The team at Schnauer & Co's have put together a resource toolkit to highlight some of the common misconceptions that some first home buyers have and provide you with tips on how to avoid some easy mistakes when buying your first home. Our expert tips will be presented over six easy to read articles, and they are all designed to help you achieve your goal of homeownership in NZ.
In the first 2 parts of the series, we discussed the solicitor approval condition and the process to follow when you are not able to satisfy conditions in the agreement for sale and purchase.
In this Part 3, we will highlight the differences between a loan from parents vs a gift from parents (AKA the bank of Mum and Dad).
As always we recommend getting good independent legal advice.
Don't forget to take advantage of Schnauer & Co's First Home Buyer Member Offer for a free 60 minute consultation.
The Bank of Mum and Dad – Loans vs Gifts
There are various ways that monetary assistance from your parents towards the purchase of a property can be recorded/protected depending on whether your parents will be loaning or gifting this monetary assistance. The most common options are:
1. A Deed Of Acknowledgement Of Debt (with or without a registered mortgage) to record that you owe a specified amount to your parents. This debt would usually be repayable upon the property being sold.
2. Co-owning the property with your parents and with your parents being registered as a joint owner on the record of title. The risk with this option is that your bank will usually require your parents to be co-borrowers under the loan agreement (or at the very least, guarantors of your obligations) and you would have to consult with your parents when you want to sell and/or refinance.
Obviously, the advantage for your parents is having some control over the property and also potentially benefitting from any increase in the equity in the property over time.
We would always recommend that any parties in a co-ownership arrangement enter into a Property Sharing Agreement. This type of agreement details the rights and responsibilities of each party to the agreement, and can address such things as restricting a sale of the property for the first 10 years (or less if the property is considered a new build) to avoid any Brightline tax liabilities for any co-owner who does not live in the property, the process to follow if a co-owner wants to sell their share, and so forth;
3. Co-owning the property with your parents, but they are not recorded on the record of title. A document called a Declaration of Trust can be entered into to record that your parents have an interest (or percentage) in the property but that the other co-owners are holding the property for the parents on trust; and
4. A gift to you that can be recorded as an early inheritance to ensure there are no disputes between siblings.
Most parents decide that gifting money is the most simple and straight-forward option for them and their children. Although they may not have a say or any control over the property that is purchased (besides maybe insisting on a Contracting out Agreement to protect their child’s interest), at least there are no personal obligations that come with considering tax and obligations as a co-borrower or a guarantor to a bank. All parties should get independent legal advice to ensure that any proposed structure is clearly documented and explained to ensure that everyone knows where they stand and what the pros and cons of each option are before deciding on the best option to take.
For more guidance on gifting or loans from parents, contact:
Kim Hunt
Senior Registered Legal Executive
phone: 09 892 0351
