In the face of record high property prices and tighter loan-to-value ratios imposed by the banks, it is becoming increasingly difficult for young Kiwis to buy their first home. As a result, many New Zealanders are turning to ‘the Bank of Mum and Dad’ for help, particularly to make up their cash contribution or for payment of the deposit.
When entering into an arrangement like this with your children or other family members, the first step is to decide whether your financial help is by way of a loan or a gift. Essentially, a loan is repayable and a gift is not.
If the money is a loan, what safeguards can you put in place?
If you are assisting children by way of a loan, you must ensure you have a loan agreement in place before any money exchanges hands. A loan agreement records the terms of the loan. For example, a loan agreement would outline the loan amount, the frequency of repayments, what (if any) interest is payable and the responsibilities of each party.
When having a loan agreement drawn up, parents must consider how much they are willing to lend, when and how they require the repayments to be made (i.e. monthly or fortnightly via direct debit or cheque) and what actions they will take should loan repayments stop.
Family loan agreements may also contain terms obliging the borrower to sign a mortgage over the property in the event of something going wrong, such as a death, separation or financial difficulty. It is important that the loan agreement contains terms allowing for a mortgage to be given, as this will ensure that the parents’ interest in the property (i.e. their money, which has essentially been invested in the property) is protected. Although it is tempting to rely on goodwill and good faith when entering into arrangements with family members, having terms in the loan agreement allowing the lender to register a second mortgage (or a caveat) over the property is a way to secure parents’ interest in the property and retrieve their money if something goes wrong.
Parents should also be aware that the loan will remain part of their estate and is assessable by WINZ in the event of any means-tested benefits.
It is important to ensure that your children have considered whether they have sufficient income to service and repay the loan. They must realise that although repayment to parents is slightly less daunting than repaying a mortgage to a bank, it is still an enforceable agreement in which payments must be made.
A clear loan agreement is vital when parents would like the money to be repaid. An agreement ensures that both parents and children are aware of their obligations and that there is no confusion about the terms under which the money is lent.
What do you need to consider if you are gifting the money?
If you are helping your children with a gift, it is important to document this in your will, particularly if you have more than one child, as you are effectively giving your child a portion of their inheritance early.
If your child is purchasing the property together with their partner or spouse, you should understand that once the gift is applied towards the house purchase, it may become relationship or shared property. This means that the gifted money is split between the couple equally – your child does not automatically get their partner’s share of it, even though it was family money.
Therefore, it is important that your child enters into a relationship property agreement recording that the gift is returned to your child in the event of death or separation from their partner. Of course, this may be tempered if there are children of the relationship.
Note: This post is brief and general in nature. You should not treat it as legal advice and should seek professional advice before taking any action in relation to the matters dealt with in this post. Armstrong Murray accepts no liability for losses suffered by any person or organisation who may rely directly or indirectly on this post.