Money Answers: can I do a reverse Bank of Mum and Dad?

BusinessDesk investments editor Frances Cook answers emails about money from readers each week. Below, you'll find her expert advice. Send your own questions to [email protected].

Hi Frances,

My parents have a small two-bedroom property in central Auckland. They're in their 70s and still working, although they will be retiring in the next few years. They have a small mortgage of about $200,000 on their property and are unlikely to pay this off before they retire.

They grew up with money being uncertain and so they haven't always made the best money decisions. 

I'm 39, with no partner or dependents, and I'm considering dipping into my managed funds to loan them the money to pay off their mortgage in a sort of reverse "Bank of Mum and Dad". 

I've recently returned to full-time study so can't service a mortgage for at least the next couple of years and thought it would be sensible to hold on to the property for the family.

I'll cover my expenses with part-time work and the student loan. I may go overseas for my second year on exchange. I've got a savings fund that will pay for this (about $50,000). It’s not a high-earning career but one with longevity. I'll be starting at about $70,000 when I graduate. 

I’ve had brief conversations around this with my parents. 

The house is two levels so it may have a limited lifespan for them. I have a sister and my parents wanted to pass the property down to both of us. 

If I pay the $200,000 then I would own most of the house and my sister would own a smaller portion when my folks die. I'm not sure how we'd work it out. Would we use the value of the house now – about $650,000 – or the original mortgage of $350,000? 

If they were to sell up to free the equity then, yes, I would receive a sum of money equivalent to what I paid in to help with the mortgage, but I'm not sure what to base the figure on. 

I worry about this scenario and losing out on potential advances I would have made staying in the managed fund. Especially when the time comes to buy a place of my own. 

I don't currently own any property. I have previously bought property with my ex, which we sold in 2021. The money I received from the sale of that property is what's tucked away into my managed fund (about $300,000, well, about $280,000 at last check, boo!). 

I am very fortunate to have this. I also have a small KiwiSaver of about $30,000. 

Any advice on my options going forward?

By the way, I really enjoyed your book, Tales from a Financial Hot Mess.

Thanks,

S

Hi S

It’s wonderful that you’re wanting to help out your parents, and what a gift to have the option to consider it.

However, these types of situations can go really, really wrong, not just financially, but also by causing rifts within families. You'll want to make sure that this generous idea doesn’t backfire and cause angst, instead of solving the problem.

Time to talk

My suggestion would be to start with a family meeting. You say you’ve had brief conversations about this, which is an excellent start. Now's the time to have an in-depth conversation, and I would suggest including your sister in it, too, seeing as she has an interest in the property.

Before the family meeting, I suggest everyone sits down on their own to write down any pros, cons and concerns about this idea. 

Then, all get together, maybe with some home baking to help smooth over any tension and share your lists with each other. Food is a wonderful leveller to get through conversations that are otherwise difficult.

It’s really important that everyone shares their thoughts on this openly. 

If you can’t stomach the idea of having a family meeting like this, then that’s a red flag for going ahead with the idea at all.

Be really prepared to face worst-case scenarios head on, because honestly, it’s too important not to. This involves both your financial future and your family's. They’re two major parts of your quality of life, so it’s important to go into it with your eyes open.

Possible problems

You mention that your parents haven’t always made the best financial decisions. I’d like you to consider whether that could continue and jeopardise the money you’re loaning them, possibly also causing resentment between the two sides.

Is it possible that your parents would want to use the house to fund some of their ongoing retirement? If their name is still on the title, and yours isn’t, they could take out another mortgage against the house without you even knowing. 

This could complicate your future finances and make it difficult for you to get back the money you loaned them in the future.

Or, you mention they may sell the house to move on. There’s the possibility of them retiring or going into a nursing home, which any of us may need in the future. 

Many people sell their house to fund these facilities, which can be expensive. 

If they ended up in an assisted-living situation for a long time, how would you feel if that used up most of the house money, not leaving much for you?

Consider also that your share investments have dipped in value at the moment. As you say, boo! 

It’s an entirely normal part of the cycle, but if you want to cash out of your investments right now and put them into paying off the mortgage, you'll lose the chance for your balance to bounce back up. The average sharemarket dip lasts between 12 and 18 months. After that, values usually start to recover. That may or may not happen this time, but that's what has happened in the past.

Of course, this risks you having to guess what's going to happen in the future and do the much-criticised “timing the market” – trying to pick the perfect time to cash out. There’s never a perfect time, that’s for sure. But if your parents aren’t retiring yet, is it worth holding off a year or two, just to make sure the market isn’t actively in a dip?

All these factors may put you off, or they may not. I don’t think there’s a right or wrong response to these issues, but I do think you need to think about them carefully.

The house split

If you do decide to go ahead with this, in terms of the financial side, I would suggest paying for a formal valuation of the house. Then I would consider your contribution to the mortgage as a percentage of that.

We’ll use your rough numbers as a guide. Say the valuation comes back as the house being worth $650,000, and you put in $200,000 to clear the mortgage. You would then own 31% of the house. You and your sister could then split the remaining 69% of the house 50:50 when the time comes, giving you a 65.5% share of the house value.

Taking it as a percentage strikes me as a fairer option, because that allows for changes in house value. 

Do bear in mind that if you kept the money in a managed fund, shares would usually go up in value more than the property would – yes, even in New Zealand’s crazy property market. 

However, property does still go up in value, and I think it’s more than fair to include value changes in any future repayment of the loan.

The legal side

Then go to a lawyer and get their advice on how the agreement is shaping up and any areas you might not have considered. Once that’s done, get the whole agreement in writing, including with your sister, and have it witnessed and filed with the lawyer.

This might sound like overkill, but this is actually the best thing to do to make sure family relationships aren’t soured by money. There are lots of ways that agreements like this can cause resentments to fester over time, and when you’re actually trying to help family, the last thing you want is for it to have the opposite effect.

Sometimes there’s a niggling concern that people don’t want to voice at the time. Talking to a lawyer can help give them the courage to voice it, and at least put the issue on the table. 

There can also be tax or ownership implications that a lawyer can help you work through ahead of time.

In life, people sometimes simply misremember a detail, through no fault of their own – human memories are janky at best. 

That's why having it written down keeps it clear and stops people adding an extra zero somewhere when they’re trying to remember who paid out what.  

Paying a lawyer at the start can be a lot simpler and easier than ending up feuding with family and chasing each other through the courts later on. 

Nobody thinks money will come between family relationships ... until it does. Heading off any problems before they happen is the best thing for everyone.

I hope that was helpful, and not too doom and gloom. I do think it’s a wonderful, generous offer that you’re considering. I just want to make sure it turns out as well as you hope.

And on a side note, good luck with the study and career change. How very exciting!

Send questions to [email protected] if you want to be featured in the column. Emails should be about 200 words, and we won't publish your name. Unfortunately, Frances is not able to respond to every email received, or offer individual financial advice.   

Information in this column is general in nature and should not be taken as individual financial advice. Frances Cook and BusinessDesk are not responsible for any loss a reader may suffer.