We live in an era where children are increasingly turning to their parents for financial support to help them into home ownership. The average house price has significantly increased over the last 20 years and at a much faster rate than the average salary. This makes it harder for children to purchase their first home – having to save more, for longer, and often having to rely on larger loans to finance their purchase.
The “Bank of Mum and Dad” is estimated to be the fifth-largest lender to owner-occupiers, just behind the big four banks (being ANZ, BNZ, ASB and Westpac). Consumer NZ has estimated that Bank of Mum and Dad provided $22.6 billion in financial support in 2022.
For parents looking to help their children into home ownership, the most common forms of financial assistance are:
- Gifts of deposits for property purchases
- Loans of deposits for property purchases
- Parents guaranteeing bank lending
- Parents co-investing with their children in property
Gifts / Loans to Children
An obvious way for the Bank of Mum and Dad to support children into home ownership is through a direct financial contribution. This can allow children to build on their existing deposit (including kiwisaver funds). However, putting funds in to assist a child in this way can come with some common pitfalls.
It is important to clarify whether this financial assistance is a “gift” or a “loan”. The legal presumption is that the payment of funds from a parent to their children is a gift unless it is expressly recorded as a loan. To avoid any doubt in future, the gift or loan should be documented – for example under a Deed of Gift or a Deed of Acknowledgement of Debt.
Where the financial assistance is intended to be a loan, parents should consider the details of that loan. For example, whether any interest is payable, and how/when the loan is to be repaid.
Key points to consider when determining whether funds paid should be a gift or a loan are:
- Parent requirements: Parents need to consider whether they might need that money back in future or whether they intend to give it to their child outright.
- Bank requirements: Banks will want to treat funds paid by parents as equity of the child in calculating their lending ability. Most banks will only do that if the funds are made as a gift. If the funds are paid as a loan, that may impact the child’s lending ability (unless their own deposit is high enough) – however, this can typically be mitigated by documenting the loan appropriately (for example, by recording that no interest is to be charged and the loan cannot be called up until the property is sold when the bank would be repaid first). This way of documenting funds as loans which are suitable for bank purposes is a common approach parents take.
- Tax implications: Any interest earned on the loan will likely be treated as taxable income.
- Residential Care Subsidy: Gifts to the child during the parent’s lifetime may be considered as a “deprivation of assets” for residential care subsidy assessment purposes. If the parent(s) move into residential care in future, an application for a residential care subsidy can consider gifts made to children from many years earlier. Even if the value of the parent’s assets falls below the threshold, the Ministry of Social Development may determine (depending on the amount of the gift) that the parent would otherwise be in a position to pay for their own care if the gift(s) to the children had not been made.
- The child’s relationship property: If a parent gives the child financial assistance towards the child’s home with their partner, this will likely be considered to be “relationship property”, even if the parent only intends to benefit their child. If a child and their partner are to separate, those funds may be subject to equal sharing under the Property (Relationships) Act 1976 when dividing relationship assets. This is a common reason that parents look to pay funds to children as loans (during the parents’ lifetimes) rather than gifts.
- Providing for other children: If a parent provides financial assistance to one child, or provides for their children in differing amounts, they should consider how they want that previous assistance to impact the division of their estate between other children. Gifts to a child while a parent is alive will not be factored into gifts made under the parent’s will, unless the will specifies the amount is to be taken into account. A loan to a child will be repayable to a parent’s estate, although the will could make the loan amount part of the share of the estate given to the child under the will.
Family Trust
Parents that have a family trust can typically use the structure of the trust to provide financial assistance to a child that is a beneficiary of that trust in much the same way that parents could do with their own funds. A trust could make a gift, which is called a “distribution”. A trust can also loan funds to a child.
Trustees would still need to document whether the funds are a gift or a loan and the terms of any repayment. A Memorandum of Wishes can record loans or distributions to a child and specify how trustees should manage these in future or when the trust is eventually distributed and wound up.
Guarantees and Joint Bank Loans
An alternative to providing funds directly to a child may be to guarantee the child’s borrowing from the bank or to jointly borrow money with the child. Both of these options come with their own risks.
If a parent was to provide a guarantee to their child’s bank lending, the parent could be liable if the child fails to make payments. The majority of bank guarantees are “all obligation” guarantees, meaning that they secure current and future lending. If the child was to borrow further funds, the parent would remain responsible even if they did not know about the additional loans. The parent would not necessarily be entitled to information from the bank as to the current level of their child’s loan or any state of default.
Parents could also jointly borrow money from the bank with their child. As a joint borrower, parents would be entitled to full information about the loan and any defaults. However, they would also be jointly and severally liable for any funds borrowed. The bank may require a mortgage over the parents’ own home as security for this lending.
Co-Investing in Property Ownership
An alternative to loaning or gifting funds, or providing security for children to borrow, would be for parents to invest into home ownership with their child. Parents could put funds into purchasing a share of a property alongside their child. Ownership in common comes with its own pitfalls, including the brightline tax rules that would apply for the parents (assuming the property invested in was not their main home). It is also very important that the parents and their child discuss and agree up front the principles for their co-ownership, including who covers which type of property expense, when and how to exit the co-ownership and how sale proceeds will be divided. Documenting the co-ownership terms under an agreement between them will provide clear rules and protection for both the parents and their child.
There are many ways parents can help a child into home ownership. Being clear upfront on what is offered and documenting the terms of that so everyone is clear will help ensure the process is successful.
Special thanks to Partner Emma Tomblin and Senior Solicitor Cailin Broadley for preparing this article.
Disclaimer: The content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.
