Tuesday, 13 March 2018
Author: Sandra Braithwaite
First home buyers face an uphill battle trying to save for a deposit on even a modest home. Property prices increase faster than savings and banks' lending criteria get tougher. Concerned parents worry that their offspring are doomed to a life of renting. Many parents would like to be able to help their children get onto the property ladder. So, if you are a parent, what is the best way to help?
One option is to lend money to your child towards the deposit. This should be properly documented in a loan agreement. You should consider whether you want your child to make regular repayments and how long the loan term will be. Will you charge interest and, if so, how much? Will you be able to vary the interest rate? If you have other children, do you have enough money to help them out too?
If you lend your child money and they are also borrowing from a bank, there may be other constraints. The bank will need to see that your child has some equity in the property. A loan from you is just another debt, not equity. The bank will also want to ensure that they are not competing with you for your child's loan repayments. You may need to sign a deed which says your child doesn't have to repay you until the bank has been fully repaid. Before committing to this, you need to be certain that you aren't going to need the money for yourself, as it could effectively be locked away for decades.
Often the bank will not agree to lend unless your contribution is an outright gift, rather than a loan. Don't be tempted to lend your child money, then tell the bank that it was a gift. Misleading the bank could have serious repercussions, both for yourself and your child.
Accordingly, you may need to simply make a gift to your child. This is very straightforward. However the money will be gone forever. You need to ensure you don't run yourself too short of funds for your retirement. You may not have many years left in the workforce, so you may not have time to replenish your savings. If you have other children too, do you have enough spare cash to make gifts to them all? You also need to be mindful about the impact gifting will have on your entitlement to future benefits such as a rest home subsidy.
Your child may instead want you to guarantee their bank debt. Think carefully before doing so. As a guarantor, your position is not much different from that of the borrower. In the case of a default, the bank may come after you before your child. If you need to put your own house up as security for the guarantee, this could result in you losing your own home, to repay your child's bank debt. If a guarantee is the only viable option, you should limit your exposure by ensuring that the guarantee is limited to the absolute minimum the bank will allow. You should also obtain independent legal advice.
You may also consider becoming a co-owner of the property with your child. This will help to protect your money, in that you actually have a share of some "bricks and mortar". You will be registered on the title of the property, which means it can't be sold or mortgaged without your consent. You can also share in the capital gain on the property. You should sign a Property Sharing Agreement with your child. This will set out important things like who pays what, who gets to live in the house, what happens when the property is sold and what happens if something goes wrong.
If you choose this option, make sure you discuss any possible tax consequences with your accountant, before selling your share.
Relationship property issues
One overlay you will need to consider, no matter which option you choose, is whether your child is in, or will in the future be in, a relationship. After 3 years of living together (and sometimes less) relationship property law deems the relationship home to be owned 50:50 by the couple. While you may dearly love your child's partner, you may not actually want them to walk away with half of your hard-earned contribution, if the couple splits.
To protect your contribution (and your child's) it is important for your child to sign a "contracting out" relationship property agreement with their partner. This is not a cheap process, as both partners must get independent legal advice. However it can save a lot of money and stress in the long run.
If you would like some more detailed advice about helping your child into their first home, please give your Harkness Henry lawyer a call. We would be happy to sit down with you and talk through your options.
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