Home finance help - Is it a gift or is it a loan?
Relying on parental help to raise a property purchase deposit needs legal safeguards, writes family lawyer Jeremy Sutton.
For couples in their 20s and 30s, it is becoming increasingly difficult to save for a home deposit. Luckily for some, generous parents are able to help out, and we often see them assisting their children in the following ways: ❚ Gift all or some of the deposit. ❚ Take an interest in the property proportionate to their share.
❚ Loan the money, with the expectation it is repaid at some point in the future.
What can go wrong?
These agreements begin with the best of intentions, so often parties don’t believe they need to seek legal advice or document them in the proper legal manner.
One of the main disputes is regarding whether the money was a gift or a loan. This is difficult to prove either way without the appropriate signed legal documents in place.
For example, a house can be purchased in the parents’ name to get around the bank LVR rules, but it is ultimately meant to be for the children, who are paying in to it. Disputes can occur later.
Issues will often arise at challenging times such as when a couple separates and the house needs to be sold.
Where there is no legal agreement, proving ownership is not an easy process. It will likely require a full family court hearing with huge legal costs.
Laws regarding property ownership can vary between countries, so overseas parents need to understand New Zealand law and formalise arrangements.
How to do it right
Have a written agreement drawn up, witnessed and certified by lawyers, so authenticity cannot be refuted at a later date.
If the amount contributed is to be a loan, lawyers will draw up a loan agreement. If parents wish to have a share in the property, then they can be registered on the title as having a percentage share.
If parents wish to gift the amount, this can be recorded as a deed of gift to their child. However, if their child applies this to the purchase of a property they buy with their partner, then it becomes relationship property, covered under the Property (Relationships) Act 1976 (PRA). This means once the couple marry, enter into a civil union or have been together for 3 years, if they separate, each person receives a 50 per cent share of the relationship property, including the gifted money from the parents.
Parents may not want gifted money shared equally between the couple if they split up. A Contracting Out (of the PRA) agreement, or a prenuptial agreement can prevent this.