The “Bank of Mum and Dad” is the 5th biggest home loan lender in Aotearoa, New Zealand. In 2022, this “Bank” dished out over $22 billion to help their children get on the property ladder.
The housing market is cooling down significantly for the first time in years. It is now a buyers’ market, and many young kiwis who have been blocked out of the market previously may be looking to take advantage of this fortuity. Likewise, many parents may now be wondering how they can help their kids get on the property ladder.
Assistance from parents can be especially helpful for first home buyers when getting their deposit together for the bank. It can take some first home buyers a decade to save for their deposit. Saving for a deposit is a huge obstacle for first home buyers as banks want to see prospective buyers have available cash funds. If parents are willing and able to help their children get into their first home, this is often where assistance is provided.
There are four main ways that parents can help their kids purchase their first home which we outline below:
Gift
A gift is money given without the expectation of repayment. This might be in the form of early inheritance. Where funds are advanced from parents to their children, in the absence of evidence otherwise, the law presumes this is a gift. Gifting may give your child full equity in their potential property and is the most straightforward way to assist as there are no ongoing serviceability concerns for your children.
When gifting, it is important to consider whether your child is single or in a relationship. If you assist your child and their partner with their first home purchase and later down the track they breakup, the ex-partner may be entitled to 50% of your gift. This is because a gift becomes relationship property when it is used to buy the family house unless the parties have entered into a contracting out agreement.
Please note that gifting may have consequences for parents in that it may make parents ineligible for residential care subsidy in the future if they require residential care.
Loan
A loan is slightly more complex than a gift as the money is required to be repaid. The terms of the loan can be decided between parties and recorded in a Loan Agreement or Deed of Acknowledgement of Debt. The loan may be repayable in instalments, or in the future when the house is sold and may be with or without interest. The agreement can also cover whether you will receive back only what you put in, or whether you will receive a share of any capital growth in the property.
This can be a favourable arrangement for both parties as parents can receive a source of income via interest, whilst still offering lower interest rates compared to a bank to benefit their children.
Also, if your child is in a relationship and they separate, you would receive your contribution back when the house is sold. Your loan would be repaid before the relationship property is divided.
Co-Ownership
Co-ownership is where parents contribute a proportion of the purchase price and take an ownership share proportionate to their contribution in the property.
It is extremely important to have a Property Sharing Agreement prepared when taking this route. This outlines the co-owners’ rights and obligations in relation the property and covers things such as what happens if someone wants to sell early or can’t meet repayments.
This can be an investment for parents whereby they share any increase in the value of the property. Likewise, parents need to consider the risk of this potential investment if the property value drops.
Some banks (Westpac, Kiwibank) offer mortgage products specifically designed for co-ownership whereby parents are only responsible for a proportion of the loan equivalent to their contribution and ownership interest.
Parents need to be aware of the bright line property rule when entering a co-ownership arrangement. If you go on the title for a property which you will not be living in and the property is sold within 10 years, then you may have to pay income tax on the sale.
Guarantee
Offering a guarantee means you offer your own property as security for your child’s loan. This helps where your children are lacking a percentage of the initial deposit required.
The benefit of a guarantee means that parents do not need to liquidate any of their assets and can help their children without contributing any cash funds.
Both you and your children would be subject to a financial analysis from the bank. All parties also need to be with the same bank.
The risk of a guarantee is that if the children stop repaying the loan, the bank can get their money back via a mortgagee sale from the parent’s property they hold as security. It is fully at the bank’s discretion as to which property they sell, and you cannot dispute this so they could sell the parent’s property before the child’s.
We emphasise the importance of limiting your guarantee. Negotiate a finite period and financial limit of your guarantee so that a few years down the line, when your children have more equity in the house, you can have the guarantee removed.
Risk awareness:
If you are thinking about financially assisting your children into their first home, it is important to seek legal advice before advancing any funds.
It is paramount that parents do not put themselves into a position of financial hardship. You should not compromise your retirement plans.
It is also important to think about being equitable between your children. If you want to help more than one child, you should consider whether there will be similar funds available for your other children. Alternatively, it may be useful to record any large gift or debt in your Will.
We stress the importance of thinking ahead about what will happen if there is a change of circumstance after entering one of the above arrangements. What if there is a relationship break up? Or someone ends up in personal or financial stress? It is crucial for parents to think about protecting themselves first before advancing funds or a guarantee from the Bank of Mum and Dad.
If you are wanting legal advice on assisting your child into their first home and what the best option for your family is, please contact us and we would be more than happy to help.
