It is estimated that around two-thirds of first home buyers in New Zealand seek assistance from their parents to purchase their first home. If you are contemplating supporting your child in purchasing their first home or subsequent property, you will need to consider the following matters.

Will it be a Loan or a Gift?

While you may be able to provide funds to your children, you will need to consider whether you might need that money back in the future (in which case it should be a loan) or whether you are able to give it to your children outright (in which case it should be a gift).

Some banks require that the money from parents towards a deposit be an outright gift. While this makes it easy for the bank to fit your child into nice tidy boxes in terms of their lending criteria, it may seriously disadvantage you. Banks will often require parents to sign a statutory declaration to confirm the gift. That stops you from saying “it was really a loan”.

Residential Care Subsidy Considerations

The discussion about loans and gifts is relevant as gifts or loans you make to your children during your lifetime may be treated as a “deprivation of assets” for residential care subsidy assessment purposes.

For example:

• You and your partner/spouse own your own home and have some modest bank savings or other cash investments.
• You decide to gift your child $80,000 towards a deposit for their first home.
• Many years later you sell your home and purchase an occupation licence for a villa in a retirement village which is almost the same price.
• Over time your retirement savings are reduced by general living costs, retirement village fees and private medical treatment.
• Eventually one of you die and the other needs to move into rest home level care.
• 30% of the purchase price of the occupation licence is lost to maintenance and amenities fees and as a result assets owned by the survivor are, by this time, below the cap for receiving a residential care subsidy.
• An application is made for a residential care subsidy.
• The application process raises the fact that you both made a gift to your child many years earlier.
• The Ministry of Social Development, which administers residential care subsidies, determines that had the gift not been made, the surviving parent would have been in a position to pay for his or her own care.
• As a result, the surviving parent must contribute $80,000 (which they no longer have) towards their residential care costs.

This illustrates the significance of the question – is it a loan or a gift? If you think you might need the money back later in life to pay for your care, your child should also be very clear that they might actually need to repay it back to you.

Relationship Property Considerations

If you decide to lend money to your child and their partner, we recommend this loan is recorded in a Deed of Acknowledgement of Debt that both your child and their partner signs.

If the bank requires the money to be a gift, and not a loan, then we recommend your child enters into a Section 21 Contracting Out Agreement with their partner recording that the gift amount is not relationship property. This will prevent the partner from leaving the relationship with half the gift amount you gave to your child.

Death

If you die before the loan to your child has been repaid, you can “equalise” the amount of the loan in any distribution to your other children and beneficiaries. That is, the debt is taken into consideration when distributing the balance of your estate between all your children and beneficiaries so that they receive an equal share of your estate. This is particularly important if you have given a loan to one but not all your children. You may wish to adjust your Will to factor in the ability to equalise if your current Will does not do this already.

Guarantees

Some banks may require parents to guarantee their child’s borrowing rather than providing a loan or gift.

Before agreeing to act as a guarantor you need to understand what you are agreeing to and what the consequences are if your child, and/or their partner/spouse, defaults on their mortgage payments. For example, can you afford to repay the loan if your child can’t? You should also be aware that often guarantees provide that the guarantor is providing an unlimited guarantee for current and future borrowing. This could allow your child to increase their borrowing without your knowledge and if things go wrong, you could be responsible for the initial and additional borrowing which you did not know about.

We recommend that any guarantee is always limited to a specified amount and not for future borrowing.

The golden rule of giving a guarantee is to never guarantee something that you cannot afford to meet!

Record it in writing

Many family disputes are caused because you decided to gift or lend your child money to purchase a home and it has not been recorded in writing. Remember, it may not be you dealing with the gift or loan dispute, it may be your executor or your attorney who has to deal with any dispute. If it is in writing, they will be better able to understand your intentions and the terms agreed to.

We recommend you also communicate your circumstances with your children openly which will minimise the risk of any disputes while you are alive, and on your death.

If you have questions regarding helping your child with their first home purchase please contact Andrew Logan, Principal (03 377 2900 / andrew@mmlaw.co.nz) or Bianca Takerei-Nuku, Legal Executive (03 343 8455 / bianca@mmlaw.co.nz).