In the current lending environment, banks seem to be requiring higher deposits from first home buyers. This, coupled with how quickly house prices have increased in recent times, means that houses have become unaffordable for many first home buyers. This often means that the “Bank of Mum and Dad” is asked to assist their children with a loan application.
There are a variety of ways this can be done, three of which are outlined briefly below:
A gift is a straightforward way to instantly increase your child’s deposit.
A gift does not have any repayment requirement and the gifted money becomes the recipient’s property outright. This is not to say that a reciprocal gift couldn’t be made at a later date but that would be solely at the discretion of the gift recipient (i.e. the child).
If you are gifting to your child and your child is in a relationship/purchasing the property with their partner, they should certainly consider entering into a relationship property (contracting out) agreement in order to retain the value of the gift as their ‘separate property’.
There can be inadvertent side effects with gifting where the amount of the gift exceeds $27,000.00 and a conversation with an accountant is recommended prior to signing a gifting certificate as this cannot be re-documented at a later date.
A gift is irrevocable and therefore needs to be carefully considered before proceeding.
Loan repayable on sale
Unlike a gift, funds can be advanced on the basis that they must be repaid at some future date.
Generally speaking, the banks are cautious with private lending arrangements, especially where interest may be charged by the lender.
In some circumstances the bank may be comfortable with a loan only if it is interest free and not repayable until the property is sold.
If you wish to use this option, please be aware that you will need to seek approval from the bank as early as possible in the process, to ensure there are no issues down the track.
Where servicing of the lending is not a problem and the application just needs some additional security to satisfy the bank’s requirements, a guarantee could be given to the bank in respect of the child’s obligations.
The nature of a guarantee means that you become liable to the bank for the obligations of the borrower. Guarantees can be limited or unlimited. If your liability is unlimited, you are effectively writing a blank cheque to the bank to cover all of the borrower’s obligations. You can ask the bank to limit your liability under the guarantee (which the bank may or may not agree to), and this is highly recommended.
Providing a guarantee is inherently risky and could ultimately result in the bank pursuing you for your child’s debts (which could involve forcing the sale of your home). Therefore, you need to be very cautious if requested to provide a guarantee, and if you decide to give one, you should seek to limit your potential liability as much as possible.
The above are some of the common methods but there are always other potential creative options.
Whichever approach is taken, there is no substitute for seeking early legal and accounting advice and discussing with your bank/mortgage advisor. Where there is sufficient time afforded, all can work together to create the best solution for your individual circumstances.
If you have any questions, please contact us for an appointment T: 06 3490090 or email email@example.com. You can also visit our website at www.horsleychristie.co.nz
Jai Stephens LLB BCom (Finance)
Disclaimer: This publication should not be construed or acted on as legal advice. It is brief and general in nature. Specific advice should be sought.