The Bank of Mum and Dad – parents contribution

Jan_Profile 1 Queen City Law lawyer Jan Chen explores how the best intentions can become derailed and create difficult situations with dangerous outcomes. To find out more about Jan click here. Are you helping your kids into a new home? Let the property law experts at Queen City Law assist with conveyancing and clear property agreements. Our property team pride themselves on delivering good results for clients. Entering into property deals without the correct documentation can lead to difficult situations and for all parties it is best to be protected in the unlikely event circumstances change or plans come unstuck. To read more articles by Jan Chen click here.

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The 20% deposit requirement has put lots of young couples without lumpy savings out of the doors of property purchasing.  The first home subsidy offered by Housing NZ is only up to $5,000 each and restricted to houses under the value of $485,000 in the Auckland region.  Despite the strict income cap for those who are in fact eligible under the scheme, it is hard to imagine quite what $5,000 per person of financial assistance can gain, given the average home price in Auckland is close to $700,000.  As such those without adequate savings who nevertheless would like to purchase a property may consider other options, such as a second tier funding option, which can be potentially very expensive, or  say ask for financial assistance from their respective parents.

If parents are willing to contribute, sometimes it is not clear whether their contribution is considered a loan or a gift.  When parents are happy to pay unconditionally towards their children’s purchase, this is a gift.  However if there are any conditions attaching to the advance,  so-called “gift”, i.e. parents contribution is conditional upon the sale of the house, or the separation of the young couple,  then this is more of a loan rather than gift. Regardless of whether this is a loan or a gift, we would recommend this to be properly documented.  Both parents and their children should also consider the impact of the Relationship Property Act 1976, and in particular, separation in the future.  Let’s consider the following scenario:

Mother A gifts the Daughter B $100,000 towards the purchase of the house. Daughter B then purchased a family home with Partner C. Four years later Daughter B is separating from her partner C.  Mother A finds out that partner C is now entitled to a half share of the gift, which is around $50,000.  Mother A would like to seek some advice.

What could we do to protect Mother A’s interest?79623970b48d071140e1d472bb75cd50

  1. to have a loan agreement addressing details of Mother A’s advance to Daughter B and Partner C’s joint purchase and then register the loan as a mortgage ranked behind the bank.

We recommend this option, because the second-ranked mortgage will make sure that Mother A gets her loan paid after repaying the loan to the first-ranked bank and before distributing any surplus back to Daughter B and Partner C.  However through our experience we note that banks are very reluctant to consent to a second-ranked mortgage, and therefore may require the “gift form” signed by the parents to confirm that they have unconditionally agreed to gift their deposit contribution to their children.  This is undesirable as the parents will have no, or very limited recourse against the child and his/her partner.  We highly recommend the parents to seek independent legal advice before signing up any form of gift certificate.

  1. to have a caveatable interest (i.e. in a form of a loan, or gift with repayment upon the sale of the property), and register such caveat;

  1. The child may also consider entering into a Contracting-out Agreement pursuant to section 21 of the Relationship Property Act 1976.

Another common situation is instead of a loan to the child, the parents may become the guarantors, or co-borrowers of the children’s purchase.  In this case, the parents may be highly exposed to the child and the partner’s borrowing.  In event of default, the bank may choose to recover the debt from the guarantors without pursuing further action against the Borrower.  Therefore parents in these circumstances are required to obtain independent legal advice in relation to such transactions.  It is important for the parents to fully understand their legal position before agreeing to guarantee their children’s loan, as potentially their own family home and retirement savings may be at risk.

In such case, we would recommend the parents to consider:

–       limiting the guarantee – if the guarantee is unlimited, the guarantor may risk losing their own home;

–       co-borrowing can be used to limit the parents’ liability, but the parents may need to check with their accountant whether this may affect their tax position.

If you are interested in finding out more about how to correctly document your fianancial assistance to your family contact our legal team at Queen City Law.