Children helping their parents
Most of us have heard of the expression ‘Bank of Mum and Dad’ where parents help fund their children to get onto the property ladder or with another investment.
What happens in the reverse situation, however, where children become the ‘bank’ and assist their parents financially?
Why would this happen?
In recent years, parents may have assisted their children in allowing their property to be used as security for borrowings by their children, they could have helped fund the deposit for a child’s first property or provided financial support in a number of other situations.
Sometimes, the boot is on the other foot when parents retire or have their income reduced. That may be the time for children to repay the favour and assist their parents.
Family-wide discussion
If children are considering helping out their parents financially, we recommend that you have a family-wide discussion on what sort of assistance could be provided.
It is important that the entire family is aware of any proposed arrangements, especially if not all of the children are going to be involved. Those children who are assisting may become part-owners of their parents’ property as part of the agreement.
There are various family arrangements that could apply but some children may already own their own home. Other children may already be living with or intend moving in with their parents. All of these circumstances will need to be considered.
Contact your parents’ lender
Presuming the transaction will be funded by a loan, rather than cash from the children to the parents, the next step is for the parents to contact their lender (usually their bank) to discuss its requirements. The lender may require the current lending for the parents to be discharged and an updated finance application in the name of all of the joint owners with new loan documents. Often, the lender requires the added security and details of a child’s income for the application.
See your lawyer
To prevent any future difficulties and dissention in the family, it is important we arrange suitable documents such as a property sharing agreement. This records each party’s responsibility for who and how the family will use the property, loan repayments, maintenance of the property, rates, insurance and a sale process for the property should there be a breakdown in the parties’ relationship or if one of the parties wish to sell.
A property sharing agreement will be the guiding document for the arrangement. As well as ensuring you have a will in place, the agreement can cover what will happen to the parent’s share of the property when they die. The last thing parents want is a falling out between their children.
Other things to consider
Other considerations for both parents and children include:
• The children’s ability to use KiwiSaver funds in the future to purchase their own home;
• Current and future relationships of the children;
• Parents moving into a rest home and how subsidies could be affected;
• The alternative of a reverse mortgage; and
• Review of wills and enduring powers of attorney.
Conclusion
With increases in interest rates and the rise in the cost of living, more retiring parents may face the difficulty of retaining their family home. Rather than the option of a sale, children may be able to assist with the retention of their parents’ home and keeping past memories alive.
