Parents helping children purchase property

With New Zealand having such a high income to house price ratio it is becoming more and more common for parents to provide some form of assistance to help their children purchase property. It's unsurprising given the rising cost of property and relatively small increases in wages. First home buyers are turning to the Bank of Mum and Dad to bridge the gap between what they can borrow from a major bank and what they need for their first home.

There are a number of different structures that can be used to help bridge the gap. Each has different considerations which need to be taken into account and are discussed below. Not every structure will suit every situation so it is important to ensure that you obtain complete advice in respect of your specific situation.

Gift

One option is for parents to provide an outright cash gift to the child to assist with the purchase of the property. The gift isn’t required to be repaid and it won’t have any negative impact on the child’s home loan application. There are some considerations to take into account the first of which is whether or not the parents are in a financial position to make an outright gift. The parents will need to consider their future needs and also any other children that they may want to treat equally. As the first step the whole family should discuss the proposal to ensure everyone understands the implications. The parents should also receive independent legal and financial advice to ensure their interests are looked after and fully advised on.

Loan

A loan from the Bank of Mum and Dad is another option. This can take many different forms including being interest free or having interest charged, being for a specific period of time or repayable on demand, having regular repayments or repayable in one lump sum. The loan option will mean that the parents can get the money back at some point in the future. This is a good option if they are not in a position to provide an outright gift. It will also provide protection to the money from any relationship property claims in the future, which aren’t uncommon. If the assistance is provided as a loan it will be included as a liability in the assessment of the child’s home loan application and it may have an impact on the parents’ own lending position.

Guarantor

A guarantee is when the parents provide a formal written guarantee in respect of the child’s lending to the bank. It means that if for some reason the child can’t repay the loan then the bank can come to the parents for repayment. Guarantees can (and should be) limited to a certain amount. This can be a good option if the parent isn’t in a position to provide cash in the form of a gift or loan. A guarantee will have a negative impact on the parent's ability to borrow from a bank because the liability under the guarantee will be taken into account. The parents should also obtain independent legal advice to ensure they understand their obligations under the guarantee.

Co-Ownership

The option of co-ownership is being used more frequently as a way for parents to help children into the property market. This option provides that the amount of money contributed by the parents gives them an ownership share in the property. The expectations of all parties should be determined from the start with them being recorded in a property sharing agreement. The property sharing agreement will be the 'contract' which governs the property ownership between the parties. It can include who contributed what, who owns what share, who is responsible for what maintenance and expenses and also how one party can sell their share of the property and how that will be valued. A property sharing agreement is vital to help avoid arguments down the track.

Final Thoughts

No matter which option is being considered it is important for everyone to fully consider the implications of the proposed structure and receive full advice from your conveyancing lawyer. This will usually include everyone obtaining independent legal and financial advice to ensure they are fully advised. One single option won’t necessarily work for everyone so it is important that advice is received early in the transaction. Do not hesitate to contact a conveyancing lawyer at Samson Legal to discuss the various options and see if one might be best for your specific situation.