Bank of Mum and Dad: The pitfalls of giving money to your kids

This year the Herald’s award-winning newsroom produced a range of first-class journalism, including investigating the state of our mental health in the Great Minds series, how NZ can rebuild stronger post-Covid with The
New New Zealand and how to minimise the impact of living in an Inflation Nation.

We also tackled our literacy crisis in our Reading Block series, while dogged investigative reporting by Kate McNamara resulted in an investigation into the awarding of contracts to businesses associated with family members of Cabinet minister Nanaia Mahuta.

The following article was one of the best-read Premium articles in 2022. The story originally ran in July.

Parents are increasingly dipping into their own savings to help their adult children with daily living costs – but that is only entrenching the wealth gap.

It wasn’t part of their plan a few years out from retirement, but a few months ago, Angela and Alexander O’Donnell walked into their bank and remortgaged their family home. They felt they had no choice – their 39-year-old daughter Natalie was facing the prospect of losing her home in Kaiapoi and having to move her two children into a rental after her marriage broke up.

Natalie wanted to buy her ex out, but she couldn’t get a mortgage. So her parents mortgaged their own home instead, lending her the money they borrowed from the bank. “How could I enjoy my life when my daughter was struggling? I just couldn’t do that,” Angela O’Donnell says.

The O’Donnells – Angela, 60, and Alexander, 65 – are part of an invisible yet incredibly popular institution known as “the Bank of Mum and Dad”. As their offspring struggle to manage their daily living costs, more and more Kiwi parents are stepping in to help: paying bills, providing allowances, stumping up deposits, and in some cases, providing entire houses.

A recent Consumer NZ survey estimated that the Bank of Mum and Dad has doled out $22.6 billion in home loans in recent years, which, if true, would make it the fifth-largest financial lender in this country – more than TSB and Kiwibank combined.

The survey, which had a margin of error of almost 5 per cent, suggested one in seven of all children who bought a house had support from their parents. The average contribution was $108,000.

In Auckland, 58 per cent of parents who took part in the survey helped their children to buy a property, and the amounts they gave were $20,000 more than the national average. For one in 10 parents, their contribution put them under moderate to serious financial strain.

The O’Donnells aren’t cash-strapped but they’re not rolling in money, either. They had anticipated being mortgage-free into their retirement.

“We didn’t think twice about mortgaging our place. This is what parents do for their children. Our grandchildren are at school and we didn’t want them to have to move around,” Angela O’Donnell says.

Although she has never given her daughters – Natalie and Danielle, now 37 – money for cars or holidays, she did give them $100,000 each towards a house deposit eight years ago, after she inherited money from her mother.

She points out that it is normal for parents in Germany – where she grew up and lived until the early 1980s – to financially support their adult children if they need it.

Natalie O’Donnell certainly appreciates the help. “I’m very fortunate that my parents could help me,” she tells The Listener after a busy day at work in an advertising agency. “I’m a single mother, and even though I have a job, the banks wouldn’t look at me. When I needed my parents, they were there and I’m lucky they could help me and give my kids security, because otherwise we would not have been able to keep this house and we would have been in a rental.”

The dark side

Although the Consumer research looked purely at housing assistance, economists point to a rising number of parents who are supporting their young adult children in other ways – allowing them to live at home rent-free (25 per cent in the Consumer NZ survey), or helping pay their tertiary education, phone and car registration bills and even holidays.

While many do so willingly, there is a dark side to the phenomenon, says economist Shamubeel Eaqub – a growing gap between the haves and have-nots in New Zealand society. In his book Generation Rent, Eaqub talks about the phenomenon of inherited home ownership.

“We are seeing the social consequences of what is a landed gentry. Access to home ownership is increasingly linked to the family you are born into.”

Eaqub says New Zealand’s housing policies after World War II were about building and supplying houses for all. Baby Boomers were the last generation to benefit from those policies, and neoliberalism hit the pockets of the younger generations.

“If you were born before the 1980s, things were pretty good. On average, if you’re born after that, you’re likely to earn less than your parents. Before the 1990s, the average house was four times the average household income. Now if you have a $100,000 income it’s for a $1 million house, versus a $400,000 house,” Eaqub said.

He agrees with the expectation that asset-rich Boomers should help their children into homes.

“I totally think that is the case and it should help people on an individual level. But the solution is: why don’t we have houses to rent that are actual alternatives?”

There is another consequence as well, says Eaqub. Because they lack financial independence, New Zealand’s Gen Zers and Millennials are growing up much more slowly.

Sharing the load

Brandon Vaaulu, 30, is the only one in his friend group to own his own home. Each day, the Kiwibank product analyst returns from work to his three-bedroom, 1970s house high on the hills in Kelson, above Lower Hutt. At the age of 27, Vaaulu got tired of renting, and was loath to move back in with his parents. “Since I was young, I wanted to own my own house, so I made that happen,” he says.

Together with a school friend, Jilson James, he became a joint owner of a $638,000 house, signing a legal contract and agreeing to pay half of all the bills. They each pay $300 a week on the mortgage, slightly more than they would to rent the same property.

“It’s really crazy, because most of my friends are living with their parents and saving for a house or they’re renting,” Vaaulu said. “With house prices the way they are, it makes it really difficult because it’s even hard to save for the 10 or 20 per cent deposit.

“I always joke that it would have been much easier if I’d been born a generation ago. But the thing is, I think it will be a lot harder for the next generation.”

Peter Bozinoff has a sign on the front of his mortgage-broker office saying: “New Bank in Town – 0% interest. Bank of Mum and Dad.” It’s a trend the broker began noticing about five years ago. Today, it’s so common that Wellington-based Bozinoff instinctively asks a client who is struggling to find a 20 per cent house deposit whether their parents can help.

“What I’m seeing is a parent somehow has to come up with the money [for the deposit]. Some have got it, some haven’t. I’ve done loans where a parent might give $30,000 to the kid for the deposit and then loan the rest from the bank,” Bozinoff said.

Some of his clients are Boomers nearing retirement and they are remortgaging their properties so an adult child can own a home. If a client has less than a 20 per cent deposit, it limits how much they can borrow or pushes up the cost.

Bozinoff says over the 25 years he’s been in the game, he has seen a lot of parents helping their children, particularly among certain immigrant groups such as the Greek, Chinese and Indian communities. But now it’s common across Kiwi society.

With rising property prices and inflation, Bozinoff has come across heartbreaking stories. “If you haven’t got parents to help, you’re screwed.”

He agrees a division between renters and property owners is being passed down the generations. “If [your] parents are in a rental, you’re going to be in a rental. It’s getting to that stage where if you don’t have the backing of your parents, you won’t get a house.”

Student loan ‘noose’

Tarn Austin can relate to that. The 27-year-old secondary school teacher is worried he may never achieve the Kiwi dream of owning a house. Austin’s parents rent a house in Auckland, and he worries he may need to support them as they near retirement. “For me, it’s almost the other way around. I may need to help my parents.”

The social sciences teacher rents a three-bedroom house in the Wellington suburb of Northland with his girlfriend and two friends. He already has a lot of debt for a 27-year-old. A $50,000 student loan feels like a noose around his neck. Although he has KiwiSaver, he doesn’t think he would be able to save enough for a house deposit to top up the Government’s First Home Grant (up to $10,000 for those in KiwiSaver for more than three years).

Austin says: “I do know people my age – friends and work colleagues – who have got into houses thanks to their parents. It can be a direct thing, where their parents give them money, or they manage to live at home and save on rent while they save for a house. I do agree there is a growing division in my generation.”

In her Wellbeing Trends Report in April, Treasury Secretary Caralee McLiesh talked about a growing wealth gap between young and old. She noted that since the early 1980s, house prices in New Zealand have increased more than five-fold – a higher rise than in any other OECD country. Back then, 73 per cent of people in their early thirties owned a home; by 2018 it was 51 per cent.

“Consider the difference in wealth distribution by age in 2000 compared with 2018,” she said. “In both cases, we see a pattern where older people have more wealth. This is expected – we tend to accumulate wealth as we grow old. But since the turn of this century, the gap between the wealth of the over-65s and under-35s has more than doubled. Limitations in our wealth data make it hard to be precise, but we estimate that at least half of this gap can be attributed to the growth in house prices.”

A growing number of young adults are also trying to get a house deposit while they are saddled with student debt. By the end of March, 665,263 New Zealanders had a student loan, with the median debt $17,602.

There is no data showing how many tertiary students avoid getting a student loan, or have a smaller one, because their parents cover their bills. But according to a recent study by the New Zealand Union of Students’ Associations (NZUSA), 41 per cent of Pākehā tertiary students get financial help from their parents. The rate of handouts is lower for Māori and Pacific students – 30 per cent and 25 per cent respectively get help from the Bank of Mum and Dad.

“This demonstrates a pretty clear inequity in the idea that students should be supported by the Bank of Mum and Dad and entrenches the unjust outcomes we see across the tertiary sector,” NZUSA president Andrew Lessells said.

Some students fall between the cracks, Lessells says: their parents’ incomes are too high to entitle them to a student allowance, or much of one, but not high enough to help them out. The answer, he believes, is a universal student allowance that allows young adults to be independent of their parents.

The wealth advantage

John and his wife Sandra thought nothing about paying the university costs of their two children and giving them each a home. Their son and daughter, now 34 and 32, both received an allowance so they wouldn’t need student loans.

The Wadestown couple – who did not want their full names used – still send $1000 a month to their daughter in Sydney to top up her salary. They also pay some of their son’s bills.

Last year, the couple gifted one of their Wellington rental properties to their son to get him on the property ladder. John thought about giving his son a $200,000 deposit towards a house, but the mortgage payments would still have been around $1000 a week.

When their daughter needs a home in Sydney, he’s prepared to buy her one. “Why would I make them get mortgages and find those kinds of deposits? Why would I put that sort of pressure on my kids? We’re giving the kids part of their inheritance now. I was always going to help the kids. The only thing it’s costing me is the money I lose in rent, which I don’t need.”

It’s stories like this that illustrate the gaping inequities within and among generations, says author and academic Max Rashbrooke. In his 2021 book Too Much Money, Rashbrooke writes about the conveyor belt of advantage. When inheritances are passed on to people who are already wealthy, it increases inequality, says Rashbrooke, a senior associate at Victoria University of Wellington’s Institute for Governance and Policy Studies.

He argues that the wealth gap begins as soon as parents buy homes in flash suburbs to get their children into top schools. He used to live in an apartment block where some university students lived rent-free in flats their parents had bought for them.

“That’s an advantage that poorer students don’t enjoy when rents are massively sky high. If your parents can afford to buy you a place to live, then you’ve got significant advantages,” he said.

Rashbrooke argues that advantage is transmitted from generation to generation. Some will inherit houses; others will never afford one.

While New Zealand lacks domestic data, in Britain – a country with comparable inequality and also an overheated housing market – 30-year-olds whose parents have property are three times more likely to be homeowners than those whose parents do not. This is up from twice as likely in the 1990s, he said.

“People who can afford to buy houses now generally have parents who are home owners. Property ownership starts to be concentrated in better-off families. Those on the up escalator, from birth their parents are able to give them all sorts of advantages.”

Beyond housing, Rashbrooke says a “bequest bulge” is looming, as wealthier Baby Boomers die or make lavish gifts to their children. Given that the wealthiest fifth of New Zealand 30-somethings already hold 70 per cent of the assets of their age group, and are much more likely to inherit, he argues this will further widen intergenerational inequalities.

“We face a future in which one of the sharpest divisions is that between well-off families, where wealth is passed from generation to generation, and poorer families, whose only financial inheritance is disadvantage,” he writes.

His solution? A KiwiSaver scheme for every Kiwi from birth, so everyone has a nest egg. He also thinks an inheritance tax should operate similar to one in Ireland, where an inheritance over €335,000 (around NZ$550,000) is taxed.

The wages chasm

Perpetual Guardian chief executive Patrick Gamble believes the wealthy would still find ways around an inheritance tax. Gamble helps clients organise bequests, wills and trusts for themselves and their offspring.

During the past decade, he has observed a rising tide of wealth being transferred from older generations to younger ones, particularly to give them a leg-up into the property market.

“Twenty years ago, you rarely saw older generations helping the younger ones. Now, it’s becoming the only blimmin’ way to get a house,” Gamble said.

He noticed the Bank of Mum and Dad appearing when the gap between wages and property prices began widening. It is now a chasm, he says, and he doesn’t think that a drop in property prices will help.

“We’ve gone from assuming that you can have a house and a holiday home a couple of decades ago, to that being the preserve of only a few. Millennials and Gen Zers have been broadsided by the economic inequality of the housing market. We’re seeing these struggles all the time.”

Gamble has noticed another trend in asset redistribution. Older Kiwis in their seventies and eighties are skipping a generation and excluding their children in favour of helping grandchildren into homes.

“They know their Millennial and Gen Z grandchildren might struggle to buy a home, so they’ll do things like put a house in a trust to support their grandchildren into their first homes. A $3 million house in Grey Lynn [in Auckland] may be able to support 10 grandkids with a deposit.”

Gamble advises parents to lend money (even if it is interest-free) rather than to gift it, to avoid relationship property battles (like the O’Donnells’ scenario) down the track.

He also warns older clients to hold enough back for their retirement, given that it’s no longer rare for people to live into their nineties.

“We have to ask clients: ‘What does this mean for your retirement? That money you might release for homes could buy shares and things that generate an income.’ If you do it for one child, what about the rest? These are all questions we need to ask,” Gamble said.