It can take ten years for people to save for a deposit to buy their first home and in many cases that means Mom and Dad’s Bank steps in.
By Mandy Te for Subject: News
Mom and Dad’s Bank, also known for getting money from your parents, has become the fifth largest lender when it comes to helping adult children financially so they can move into their own homes.
Parents provide $22.6 billion in loans to adult children, according to Consumer NZ. It’s no surprise people receiving financial help from parents or other family members for a home – but the latest figures from Consumer NZ are sobering, says an economist.
For Aroha Faletolu, getting her first house at 19 wouldn’t have been possible without her girlfriend vouching for her and her then-partner.
A guarantor is someone’s replacement when it comes to a mortgage loan, a car loan or the signing of a credit agreement. If the person stops paying, the guarantor must pay.
“I finished school in 2012 and moved in with my ex’s family. I wanted to save for a house. He and I started saving for a vacation and it got to a point where he was eager to join in on my dream,” the 27-year-old says.
Both had found jobs right after high school – Aroha worked in a bank, where she found herself learning budgeting and banking.
“I already knew the process [for buying a house] and I knew I needed a surety. Nana owns her own business and agreed to be our guarantor. She accompanied us to the first appointment.
Their pre-approval – an acknowledgment from the bank that you can borrow a certain amount for a house – was approved soon after.
In 2012, they bought a three-bedroom detached house at Karori in Wellington for $320,000.
In June 2021, Aroha sold the house for $850,000 and purchased a two-bedroom townhouse in Mt Cook in early July for around $900,000.
If people didn’t know money or had family support, it would be hard to save for a house, especially now when banks have changed the rules, she says.
“I was very lucky to have entered when I did…if Grandma hadn’t signed up, we wouldn’t have been able to have a house.
“We had no security – we never even got a credit card. Without my grandmother, the bank would not have lent the money…. Without her, we would have kept saving and would have had to wait longer – we might have missed our chance.
Aroha says there is a lack of education on money and budgeting, and these are subjects she believes should be mandatory for high school seniors.
“If people are pushing you to go to college, they should definitely teach you how to manage your budget,” says Aroha.
Bank of Mum and Dad plays ‘hub’ role in first home buying process
Consumer NZ, an organization focused on consumer protection and information, found that more than half (61%) of parents contributed to their adult children’s home deposit.
For one in ten parents, helping their children financially puts them under moderate to severe financial pressure. And nearly one in four parents had to cut spending to help contribute.
In Auckland, parents were more likely to support their adult children, but this could be due to higher than average house prices, according to research from Consumer NZ. But parents in Auckland also reported twice as many moderate or severe financial difficulties (19%) compared to the national average (10%).
“This reason could be partly because parents in Auckland are more likely to leverage their existing property and reduce spending to cover costs,” the research found.
READ MORE: How the housing market got so baked
Gemma Rasmussen, head of campaigns and communications at Consumer NZ, says the majority of parents (87%) offered to pay or were happy to help their children get into home ownership.
“The role of Mom and Dad’s Bank is more crucial in the first home buying process, but it also means we’re seeing a bigger social divide between who can buy a first home and who doesn’t. “, Rasmussen said. .
“We’ve reached a point in New Zealand where it’s no longer enough to do all the ‘right things’ to buy your first home – to get a job with a good income, save furiously and reduce ‘goods to have’.”
“I don’t think I could have found a home without mom”
In Auckland, Whitney and her sister bought a house in December 2019.
“I think if we had waited until after the pandemic, with the way real estate prices are and the amount of loans, the house we bought would have cost $200,000 to $300,000 more.”
Whitney, who works in banking and asked that her last name not be included for privacy reasons, says she and her sister bought their five-bedroom house on the Te Atatu peninsula thanks to the equity in their mother’s house.
Equity is the difference between the market value of your property and the amount you still owe on your home loan – if the market value of your home is higher than the amount you owe, you can use it to get a loan.
It was through Whitney’s work in a bank that she knew what processes she could follow when it came to buying a home.
“I don’t think we could have done the same in 2022 with the way interest rates are moving now, and our financial situation has changed over the past two years…realistically, there would have been no medium.
“I don’t think I could have found a home without mom.”
A step ahead
Rebecca Thompson-Looij says she’s dreamed of buying her own house since she was 12.
She says she wouldn’t have thought of owning her own house if her great-grandmother hadn’t left her some money as an inheritance.
This money went towards her deposit and after graduating from high school, Rebecca got a job working 30 hours a week.
Many mortgage brokers — especially male mortgage brokers — laughed at her, Rebecca says.
“They thought I couldn’t do it and thought I didn’t have the income. But I’d gone through the numbers a million times and thought, “I could do this.” They didn’t take me seriously. »
In 2020, at the age of 18, Rebecca proved those mortgage brokers wrong – by buying a three-bedroom house in Christchurch’s Waltham for $320,000.
“I was privileged to have had the thought [of buying a house at a young age] …it’s so out of reach for a lot of people and I had such a head start.
Financial help from family people is ‘even more excluded from the market’
Chief Economist and Infometrics Director Brad Olsen says it’s no surprise parents are big lenders, especially since it’s been tough for people trying to buy their first home .
However, the latest figures from Consumer NZ were tearful, he says.
The main hurdle for people wanting to buy their first home is having enough money for a deposit – this is where Mom and Dad’s Bank has often played a part, says the 25-year-old.
Olsen says that for young people who want to enter the housing market, if they were to do it on their own, it would take them about a decade to save for a deposit.
But for people who didn’t have parents, or if their parents didn’t own a home they could use to get a loan, they would be even more excluded from the market, he says.
“We need to have a high level of construction across the country. We need to open land to buy. We also know that as housing demand increases, New Zealand is building between a third and a quarter less [than before] so we have a lot of catching up to do.
“Getting more construction and more housing – that kind of stuff is key. According to a new analysis, it’s the supply of land that has to come through here.
“How young people feel about the housing market is not unusual,” he says.
READ MORE: Human Rights Commission launches inquiry into housing crisis
He encouraged people to talk about their finances in order to find the right path that would work for them. It’s something he says isn’t done enough in New Zealand.
Aroha agrees and says there should be more open conversations about money. “It’s still quite taboo for people to talk about it. I’m Maori and Pasifika, and a lot of people from those cultures don’t talk about that.
Olsen says, “As a youngster, I’m not really willing and ready to give up. I’m afraid some have. It is an incredibly difficult route but still doable. We just have to keep focusing on doing better.”
“For more affordable prices, house prices have to come down, and [politicians] must be ready to let this happen and contribute to the regulation, as well as the development of the offer.