Your Guide To Parents Assisting You In Purchasing Your First Home
Buying your first home can seem daunting, but that is why you have professionals to guide you and facilitate the process. We would always encourage you to come to your lawyer first or as soon as possible. We can then assist you from the start with ensuring that the contract is in order, that you are buying what you think you are and that the conditions will work for you. With a good conveyancing lawyer and a little forethought, you can smoothly steer through the process.
There are other important considerations as well such as where your deposit is coming from. Many first home buyers will be using Kiwisaver or the Home Start Grant. Both of these require an application which will take 10 or more working days to complete and receive the funds. It is important that we get on to the withdrawals as soon as possible alongside you arranging your finance.
Parents Helping Children Purchase Property
It is increasingly common for parents to provide some form of assistance to help their children purchase their first home. Its unsurprising given that New Zealand has a high income to house price ratio. First home buyers are turning to the Bank of Mum and Dad to bridge the gap between what they can borrow from a bank and what they need for their first home.
There are a number of different legal structures that can be used to help parents assist their children who are first home buyers. Each has different considerations which need to be taken into account and are discussed below. Not every structure will suit every situation so it is important to ensure that everyone obtains complete legal advice in respect of their specific situation.
Parents Gifting
One common option is for parents to provide an outright cash gift to their child to assist with the purchase of property. The gift isn’t required to be repaid and it won’t have any negative impact on the child’s home loan application.
As the first step the whole family should discuss the proposal to ensure everyone understands the implications. The parents should also receive independent legal and financial advice to ensure their interests are looked after and fully advised on.
There are some considerations to take into account the first of which is whether or not the parents are in a financial position to make an outright gift. The parents will need to consider their future needs and also any other children that they may want to treat equally as an important part of asset and estate planning. Gifting, if not managed correctly, can affect the parents eligibility for a future residential care subsidy. The rules of the residential care subsidy are often changing and it is difficult to predict how the thresholds might change in the future. What is certain at the moment is that the Ministry of Social Development will consider all gifting an applicant has completed. Any gifting above the specified limits is considered “excess gifting” and will be counted towards the parents total assets, and will impact their chances of being eligible for the subsidy.
Parents Loaning Cash
A loan from the Bank of Mum and Dad is another common option. The loan option will mean that the parents can get the money back at some point in the future.
Loans can take many different forms including: · being interest free; or having interest charged · being for a specific period of time; or repayable on demand · having regular repayments; or repayable in one lump sum.
A loan, rather than an outright gift, can also provide protection to the money from any relationship property claims in the future.
However, if the assistance is provided as a loan it will be included as a liability in the assessment of the child’s home loan application and it may have an impact of the parents’ own lending position.
Parents Guaranteeing Bank Loan
A guarantee is when the parents provide a formal written guarantee in respect of the child’s lending to the bank. It means that if for some reason the child can’t repay the loan then the bank can come to the parents for repayment. Guarantees can (and should be) limited to a certain amount.
This can be a good option if the parent isn’t in a position to provide cash in the form of a gift or loan. However, a guarantee will have a negative impact on the parents ability to borrow from a bank. The parents will be required to obtain independent legal advice to ensure they understand their obligations under the guarantee.
Co-ownership
The option of co-ownership is another way for parents to help children into the property market. This option provides that the amount of money contributed by the parents gives them an ownership share in the property. A property sharing agreement is vital to help avoid arguments down the track. This is a contract which governs the property ownership between the parties.
It is vitally important that when considering co-ownership that all parties receive legal and accounting advice, particularly with the bright-line test. The bright-line test has meant that many well meaning parents can become subject to a capital gains tax where they have entered in to co-ownership with their children and the property is then sold within the applicable period. The test period for properties purchased today is 10 years. You can imagine that this causes a fair bit of undue stress when parents discover their tax liability down the track, often when the property is already under contract to sell.
Start Your First Home Journey with The Legal Team’s Expert Advice
No matter which option is being considered it is important for everyone to receive independent legal and financial advice to ensure they are fully advised. One single option won’t necessarily work for everyone so it is important that advice is received early in the transaction. Don’t hesitate to contact The Legal Team to discuss the various options and see if one might be best for your specific situation.