Does the Bank of Mum and Dad need protecting?
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Does the Bank of Mum and Dad need protecting? Many of our clients are in this boat. A son or daughter decides it’s time to buy a house while it’s affordable. Well, affordable if mum and dad stump up with a chunk of the deposit. The Bank of Mum & Dad to the rescue.
Most parents are able and willing to help out, but it is wise to make the arrangement quite formal. It can save a bucket load of problems that neither you or your kids anticipate.
If the son or daughter is single
- Document everything. Get any gifting or loan arrangement written down and signed. Make the terms very clear.
- Consider the other children. In assisting one daughter or son, are you inadvertently creating a divisive sense of ‘unfairness’ amongst the other kids?
- Does this impact on your Will? It would pay to clarify the will so that it takes account of money already forwarded to the child. Until the loan is paid off, they still owe the estate. Otherwise the Will may be unfair on the other beneficiaries.
- Don’t compromise your own retirement plans. If you have squillions to share around, then no problem. But if your retirement plans demand a tight budget, then consider very carefully the impact of lending out the money.
- If there are health issues on the horizon, remember, loans or gifts get clawed back into your asset pot if you ever apply for a Residential Care Subsidy.
What if your child has friends with whom they are buying a house together?
- Protect yourself. Always make sure their ownership is arranged as “tenants in common” and they have a property sharing agreement to agree costs and how each party may exit. You don’t want to be left holding the baby if the friends fall out, or if one party decides to sell-up and move on.
- Document parental loans to one or both parties. Helping the happy couple to buy a house
- A gift becomes relationship property when it’s used to buy a house unless there is a clear “contracting out” agreement and separate legal advice for each partner.
- A loan documenting specified terms should be made to and signed by both partners. Then if there’s a break up the departing spouse owes half as well.
A guarantee? Parents’ home equity pledged for a deposit
Guarantees are easy to offer, and we underestimate what could possibly go wrong. Well, you could lose everything.
- Never make a mortgage guarantee unlimited. Imagine if your kids spend up large and default on repayments? Or they are incapacitated, and uninsured, in an accident. The banks would go straight to you as guarantor. Now what do you do?
- Negotiate terms and limits with the bank.
- Set a finite term for the period of guarantee. Don’t forget about it. Have the guarantee removed after a few years as your offspring’s equity in the new house grows.
Parent and child share ownership
- Co-ownership might render your child ineligible to make a “KiwiSaver” purchase; so check that first.
- By sharing ownership both you and your child benefit from any capital gains.
- Parents in this situation often lose track of how much equity they have in the new house. Yet you are still vulnerable to risk, and your retirement may demand the freeing up of your capital. The ownership terms need to be crystal clear to both you and your child including a formula for who pays costs and what happens when mum and dad need their money back.
Family trust buys for child
- In some situations, a Family Trust may still be an appropriate vehicle for assisting a daughter or son into a home of their own.
- The Trust can instead lend the money or gift the money which comes with very different implications. For instance, if the Trust makes a gift, it will become relationship property unless there is a “contracting out” agreement.
- Trustees are obliged to consider all beneficiaries and the impact it will have on the other beneficiaries.
Our advice: before entering into any arrangement, you must see your lawyer and ensure any documentation reflects your wishes.