The bank of mum & dad

By Debra Barron, Principal of ClearStone Legal

We recently heard of a case where $50,000 was lent by a parent to their child to help them with the deposit for the purchase of a property.  The mortgage broker provided a gifting certificate for the parent to sign to help with the mortgage application, but actually the arrangement was meant to be a loan not a gift.  Signing this certificate unfortunately set them up for failure when the relationship between the child and their partner broke down.  Even though there were text messages from the partner agreeing that it was a loan, when it came to the crunch they denied the loan and relied on the gifting certificate to avoid repaying the loan in the relationship split.

There are three ways to protect funds when trying to help your kids get a step up onto the property ladder. 

Don’t give them the money – make it a loan

We recommend entering into a loan agreement recording the terms of the advance and to secure repayment later on.  In order to get finance approved by the bank, the terms of the loan agreement will need to state that the loan is interest free, that there are no repayments during the term of the loan and that the loan can only be demanded for repayment when/if the property is sold.  A simple deed of acknowledgement of debt signed by both your child and their partner will secure repayment of the debt on the later sale of the property.

Gift the money conditional upon the parties entering into a Contracting Out Agreement

If you do want to make it a gift and have no expectation that it is ever to be repaid, but you want your gift to go to your child and not lose half of it in a relationship split, then your child and their partner could enter into a Contracting Out Agreement (also called a S21 Agreement or Property Relationship Agreement – of if you prefer the American term, a pre-nuptial agreement).  Such an agreement contracts out of the Property (Relationships) Act 1976 which would otherwise provide a presumption of 50/50 sharing of relationship property.  Often these agreements are entered into when one party to a relationship has significant more deposit to pay towards the purchase of a new home.  These agreements can be very narrow, and only deal with the deposit (i.e. all capital gains are shared equally notwithstanding the unequal contribution); or the agreement can be more complex and provide for more separate property such as Kiwisaver, superannuation, business interests, income, other property, an interest in a family trust etc).

Jointly purchase the property with them

This option used to be more feasible but unless you are going to jointly occupy the property then you could be hit with a capital gains tax when they try and buy your share from you later on.  Further, if your name is on the title then in most cases you will need to be part of the finance application and be jointly and severally liable for the loans owing to the Bank.  The complexity of these two issues make this joint ownership in most cases unworkable but not impossible.

Obtaining some advice at the outset can ensure there are no misunderstandings further down the track.  For free no-obligation advice, give us a call on 09 973 5102 or make a time to come and see us at either our Kumeu or Te Atatu office.