The Best Ways to Unlock BOMAD (the 'Bank of Mum and Dad')

A blueprint for New Zealand intergenerational financial success

The 'Bank of Mum and Dad' (BOMAD) has become a significant, albeit unofficial, New Zealand financial institution. Especially for many first-time homebuyers, a helping hand from parents can be the crucial difference between dreaming and doing. But just like any serious financial venture, approaching BOMAD requires careful thought, clear communication, and an aligned plan to ensure it benefits everyone involved and fosters, rather than hinders, long-term financial independence.

Gone are the days when a casual handshake sealed major financial agreements. Today, with rising property prices and the ever-present cost of living, BOMAD is moving beyond pocket money into substantial contributions.

Why BOMAD Matters

It is now widely accepted that if BOMAD were a bank it would be New Zealand’s fifth largest, behind the “Big Four” banks: ANZ, ASB, Westpac, and BNZ. BOMAD’s current funding pool dwarfs many smaller banks, and even outstrips lenders like Kiwibank and TSB combined.

According to research from Finder, nearly 60% of first home buyers in New Zealand receive some form of financial assistance from BOMAD.

The sheer scale of this phenomenon underscores its importance. The Productivity Commission estimates that over the next two decades, a staggering $3.5 trillion in wealth is expected to transfer from older generations to younger ones, predominantly from housing assets. This intergenerational transfer, when managed wisely, can be a powerful catalyst for wealth creation across the family.

More Than Just Money: The BOMAD Advantage

While the primary benefit of BOMAD often appears to be financial, the true value extends far beyond the dollar signs. For adult children, it can mean entering the property market sooner, potentially years earlier than those without such support. It can also mean a stronger financial footing post-purchase, with 41% of Australians receiving help reporting more savings after buying their first home. We think New Zealand data, which is harder to come by, would tell the same story.

For parents, providing support can offer immense satisfaction, knowing they are helping their children secure a brighter financial future. However, it's not without its considerations. While three quarters of parents providing deposit assistance don’t commonly expect repayment, suggesting a shift towards gifting, it's vital that parents ensure their own financial security isn't jeopardised. After all, you can't pour from an empty cup, especially not a cup that was supposed to fund your retirement cruises!

Related topics:

• ‍How to pass on wealth to the next generation
• How to make it work when grown children move back with their parents
• Why you should spend your kids’ inheritance
• Retirement fears and how to overcome them
• Your boomerang kids could ruin your retirement

No BOMAD Behind You?

If you don’t have the financial backing of BOMAD behind you, remember your financial journey is still entirely within your control. This is where true self-reliance shines. Focus on the powerful levers you can pull: rigorously budget, maximising your savings rate, boost your income, and relentlessly upskill to progress your career and financial literacy.

It might not be easy, and your path might look different from those with BOMAD, but every dollar saved, and every smart financial decision made is a brick in your own foundation. Embrace the challenge, be resourceful, and know that for you, building your wealth, brick by hard-earned brick, will lead to an even deeper sense of ownership and accomplishment. Your destiny is in your hands.

BOMAD Practicalities: Gift, Lend, or Guarantee?

While the name BOMAD sounds light-hearted, the decisions involved can be anything but.

Unlike traditional banks, BOMAD rarely requires a credit check, legal agreement, or repayment plan. What could possibly go wrong?

BOMAD support can take various forms, each with its own implications and best practices:

• Gift: This is probably the simplest and most common form of assistance, particularly for deposits. If the money is a clear gift with no expectation of repayment, it can strengthen an adult child’s home loan application. However, proper documentation is crucial. Banks will want to see a gift letter confirming the funds are non-repayable and not a loan in disguise. From the parents' perspective, it's essential to understand any potential implications for their own financial situation, including any gifting limits that might affect social security benefits. You’ll also want to understand potential relationship property implications. In New Zealand, if a gifted sum becomes intertwined with a child's relationship property (for instance, it is used to purchase a shared home), it could be subject to division in the event of a separation, even if it was originally intended solely for your adult child. This is where legal advice can be money well spent.
• Loan: A formal loan from family can be an excellent option. It allows for more flexible terms than traditional lenders. However, it’s crucial to treat it like any other loan. If you choose this route, we strongly recommend using a Deed of Acknowledgement of Debt or similar legal document. This means a written loan agreement outlining repayment schedules, interest (if any), and what happens in unforeseen circumstances. This isn't just about protecting the parents, either. This is about developing financial responsibility in the adult child and preventing awkward silences at Sunday dinner.
• Guarantee: In this scenario, parents use their own property as security for a portion of their child’s home loan. This can help an adult child avoid Lenders Mortgage Insurance (LMI) or borrow a larger amount. While seemingly helpful, this option carries significant risk for parents, as they become liable if their child defaults on the loan. It's akin to co-signing for a friend, but with potentially much higher stakes and far more emotional baggage if things go south. Independent legal advice for both parties is key.

Regardless of the method chosen, clarity and legal documentation are your best friends. Formal agreements and independent legal advice are vital to protect all parties involved. This foresight helps avoid potentially family-destroying future misunderstandings.

Empower Both Generations: Make the Most of BOMAD

For both parents and adult children, maximising the benefits of BOMAD means focusing on:

For Parents:

1. Assess Your Financial Health First: We’ve all heard the announcement during airline safety briefings: should oxygen masks fall from the ceiling, put on your own mask before assisting others. Think of assistance to adult children in the exact same way. Before you extend a helping hand, ensure your retirement plans, contingency savings including for possible medical care, and other financial goals are rock solid. It's crucial not to compromise your own future.
2. Clearly Define the Support: Is it a gift, a loan, or a guarantee? Put everything in writing. This protects both sides and sets clear expectations. A casual chat over a tea or coffee won't cut it when hundreds of thousands of dollars are on the line.
3. Encourage Financial Literacy: Use this opportunity to impart valuable financial lessons. If you haven’t already, ensure your adult children have a clear idea about budgeting, saving, investing, and the responsibilities of homeownership.
4. Ensure Fairness: Support to one child can be tricky if other children are watching on.
5. Seek Professional Advice: Consult with a financial adviser (surprise surprise, that includes the team here at Become Wealth) and solicitor to understand the tax implications, legal structures, and potential risks associated with the chosen form of assistance. This ensures your generosity is both effective and sustainable.

For Adult Children:

1. Embrace Responsibility: View any support from BOMAD as a springboard, not a crutch. Your primary focus should remain on building self-reliance and taking ownership of your financial destiny.
2. Treat It Appropriately: Just because this money didn’t come from a bank doesn’t mean it came without cost. Your parents might have sacrificed their retirement savings, travel plans, or home upgrades to help you.
3. Formalise The Agreement: Insist on clear, written terms, even if it feels awkward at first. This demonstrates maturity and protects your relationship with your parents. Understanding repayment terms (if applicable) and ensuring they align with your budget is crucial.
4. Pay It Forward: No, not necessarily to your parents. But keep the BOMAD generosity alive by becoming financially literate and resilient. Build habits that mean you might one day help the next generation.

The Bigger Picture: Beyond the Bank

The rise of BOMAD is a testament to the enduring love and support within families. However, it also highlights broader societal challenges around housing affordability and financial literacy. By approaching BOMAD with a practical and transparent mindset, both parents and adult children can transform what might otherwise be a well-intentioned but haphazard exchange into an engine for intergenerational wealth and sustained financial well-being.

The Bottom Line: Make the Most of BOMAD

Done well, BOMAD can catapult the next generation into home ownership, relieve pressure, and build long-term wealth across generations.

But done poorly, it can create resentment, risk, and long-term regrets.

Whether you're a parent considering how best to support your children, or an adult child looking to maximise the opportunities presented by BOMAD, professional guidance is invaluable. At Become Wealth, our experienced mortgage advisers and financial planners work with both sides of the BOMAD equation. Whether you're giving or receiving, we can provide tailored advice and support, ensuring your financial decisions are well-informed and aligned with your long-term goals. Get in touch with our team to book your complimentary initial consultation.