HELPING YOUR KIDS ONTO THE PROPERTY LADDER – A GUARANTEE, LOAN OR GIFT? IT REALLY DOES MAKE A DIFFERENCE. Atticus Legal, Property Lawyers Hamilton

Because of the Reserve Bank’s loan-to-value requirements, most home buyers must now have a 20% deposit. Given rising property prices first home buyers struggle with this. Parents are sometimes asked to help out, either by giving a guarantee to the children’s bank (usually secured by a mortgage over the parent’s home) or by a loan or gift by parents of an amount sufficient to make up the required deposit.

This article focuses on the loan or gift question. For comment on the alternative of, and the consequences of, parents’ guaranteeing their childrens’ bank loans see our article ‘When a guarantee bites back!’ on our website at https://atticuslegal.co.nz/when-a-guarantee-bites-back-practical-tips-to-reduce-the-risk-by-atticus-legal-business-property-lawyers-hamilton/

But even if parents are willing and able to help, sometimes they may not in fact have a free choice between each of the above options – guarantee v loan v gift. And even where they can make a choice, the consequences of which choice is made can lead to significant differences in outcome and different effects for the parents themselves.

Guarantee v loan or gift

Where the children’s security or ability to service the proposed home loan repayments do not stack up, traditionally banks have required (if available) a guarantee from parents as a condition of loan approval for the children. However, more recently where the children do not have the required minimum deposit the banks are looking for a cash contribution from the parents, either by loan or gift to the children.

Do the banks prefer a loan or gift?

In some cases the banks are expressing preference for, or sometimes insisting on, the parents’ contribution being a gift rather than a loan. The children need to be very clear on the bank’s requirement here (parental loan or gift) before they confirm a finance condition in their purchase contract to avoid problems arising before settlement if it is only then realised that the bank requires a gift rather than a loan.

The bank may require ‘evidence’ that the parental contribution is a gift rather than a loan, for example by a deed of gift.

The parents likewise need to be clear on this taking into account the below-mentioned different implications of a gift v a loan. If the bank requires a gift, that may make a difference as to whether or not parents are still willing to make the contribution.

By the way, you can’t tell your lawyer to record it as a gift but that it is really agreed with the children to be a loan. First, if your child and his/her spouse split up the written record of a gift will mean you can’t recover from your child’s ex. And also not often realised is the fact that when a lawyer acting for a home buyer receives loan and security instructions from their bank, that lawyer is also acting for the bank. A disclosure like this to a lawyer would put them in a very difficult position in light of their duties to the bank. Legal ‘privilege’ does not apply to such circumstances.

Why do banks prefer a parental gift rather than a loan to the children?

Simply put, from the bank’s perspective they don’t want the children to be ‘over-burdened’ with debt, even if the parental loan is unsecured and interest-free.

Consequences of the difference between a loan or gift by parents to a child and his/her spouse or partner

A gift is a gift. It can’t be taken back, even if your child and his/her spouse or partner later separate. The gift becomes their ‘relationship property’ when it is applied to their home purchase and therefore to be divided equally between them following separation. Even if you expressly make the gift to your child alone, in the absence of an appropriately worded contracting-out (‘pre-nup’) agreement when that gift is applied to the purchase of their family home (which is relationship property) the gift will become relationship property.

However, if the parents’ contribution is documented as a loan to their child and his/her spouse or partner then it is not a gift. If they separate the parents can recover half of that loan from their child’s ex as it is ‘relationship debt’. Such loans are often recorded as upon demand and interest free. The parents may or may not choose to forgive that loan in their wills.

Usually it is an unsecured loan, which has risks associated with it like any other unsecured loan – eg. bankruptcy of the borrower. It is legally possible for the parental loan to be secured by a second mortgage over the home of the child and his/her spouse/partner, but only with the prior written consent of their bank as first mortgagee. In the case of first home buyers the bank will be reluctant to give that consent.

If the child’s bank insists on the parental contribution being a gift, another possibility is for the parents to become co-purchasers and to take a share in the title. However, if the child is a first home buyer this is likely to cause problems for the Kiwisaver first home withdrawal and/or Homestart grant.

Perhaps an even more important consideration for parents is the effect that gifting a large sum may have on any future application they may make for a rest home subsidy (called ‘residential care subsidy’). This is means-tested in terms of both maximum asset and income thresholds. Any gifting prior to such an application is taken into account in determining whether or not you qualify for the subsidy.

This is important because rest home care is not cheap and can drastically reduce your resources (and in turn the amount your kids will inherit) if you don’t qualify. A gift of more than $27,000 can count against you in this respect.

Lastly, gift duty has now been abolished, so it is no longer a relevant consideration.

So the loan or gift question is more complicated than you might think. And sometimes the bank may insist on a gift anyway. If parents agree to proceed on that basis they need to be aware of the above-mentioned consequences.

WANT TO KNOW MORE? Just ask Atticus Legal, Property Lawyers Hamilton

CALL ANDREW SMITH, the owner of Atticus Legal, for expert professional advice on any of the matters referred to in this information sheet.

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This information sheet is copyright © Atticus Legal, August 2016.