Do you recall buying your first property? For most of us, home ownership was accompanied by competing degrees of excitement and fear. We loved the freedom having a place of our own gave us. At the same time, we were well aware of the financial commitment we’d taken on in the form of monthly mortgage repayments. Whilst we dreaded getting a mortgage, many kiwis these days fear not being granted one because that means they’re locked out of owning a home. Parents who are cognizant of this frequently want to assist their offspring into homeownership. This article discusses how parents can help their children take their first step onto the property ladder which could be timely advice given summer and the property buying season is upon us.
WAYS TO OWN A HOME
There are several ways in which the legal title to a home can be held. For example, the title could be registered solely in the name of the child whose home it will be. Alternatively, the title could vest in the child and the parents. Where this latter option is taken, ownership may be joint or held as tenants in common. When considering ownership preferences, the parties circumstances may need to be considered. Questions such as do any of the parties need to hold their legal interests in a trust for asset protection reasons come to mind. Other matters such as is the child using their Kiwisaver monies or is the child in a de facto relationship and should the child’s partner be registered on the title as an owner can also affect ownership preferences. Finally, mechanisms of financing may influence how the property is legally owned. Succinctly, the varying methods of ownership are important legal distinctions. To ensure those distinctions are considered and all parties’ rights are protected, obtaining advice is strongly recommended.
WAYS TO PROVIDE FINANCIAL ASSISTANCE
In the same manner as there are alternate legal ownership models, so are there different methodologies of providing financial assistance to a child.
Common way of providing aid include parents lending funds directly to their child or gifting their child a certain amount of money.
Questions such as is there an expectation the lent funds will be repaid and are the lent funds derived from the parents personal savings account or are they trustees monies may need to be addressed. When the child is borrowing money from a Bank to complete the home purchase, a Bank’s requirements will also need to be considered.
Other than lending money, parents could be requested to provide Bank guarantees in relation to their child’s borrowings. When this occurs, contemplation as to whether the guarantee should be unlimited or limited to a particular sum should be given.
EXAMPLE
An example below demonstrates some of the points raised above.
David and Sarah want to help their son, John, buy his first home. David and Sarah intend to provide money equivalent to one third of the purchase price of the property to help John. This money is held in their Trust’s bank account and is trustee money. John has a girlfriend, Mary, who will also be living in the home. John and Mary are both intending to use their Kiwsaver balances towards payment of the property. In addition to the money they receive from John’s parents, they will also need to raise a mortgage from their Bank. Whilst David and Sarah are happy with John’s choice of partner, they are a little concerned should the relationship dissolve, the money they advance will be lost.
POTENTIAL ISSUES AND ANSWERS
“Pass the parcel” is the quote that bears relevance to addressing the above scenario. Undoubtedly, lawyers representing all parties interests should be consulted at the very beginning of this transaction as there are several ways in which ownership and financing could be structured.
One potential pathway forward is to consider the flow of funds. Whilst David and Sarah wish to ensure the funds are safe should John and Mary split, the money they are lending is actually not theirs – it’s trustee money. Accordingly, the independent trustee must be consulted. They are unlikely to permit funds to be lent without adequate documentation and protection in place.
As Kiwisaver money is being used, Kiwisaver Rules must be complied with. At the time of writing, this means ownership of the home must be in John and Mary’s names.
John and Mary are de facto partners with separate interests. Those interests may be best served if documented.
As is to be expected, the Bank will want to protect its position and receive the highest security possible. Accordingly, the Bank will likely request David and Sarah provide an unlimited guarantee. As David and Sarah’s home is held in the Trust, the independent trustee will need to give their consent to the guarantee and so should be consulted.
A possible solution to the myriad of issues noted above may be for David and Sarah’s Trust to acquire a one-third share in the property, with John and Mary holding the balance of the property. Trusts for John and Mary could be put in place. Ownership in this manner could be documented by way of a Property Sharing Agreement. That agreement may contain keystone events such as in 3 years’ time, John and Mary will seek further finance to repay David and Sarah’s Trust so they can own the whole of the property. John and Mary’s interests could be protected by them both entering into a Property Relationship Agreement. Finally, a request to the Bank to limit the guarantee the Bank require could be made. With the property being owned in the above manner, the Bank may be willing to accede to this request.
Remember the above is just an example and advice should be sought.
SUMMARY
Property buying season is upon us. Property is aplenty. Mortgage interest rates have been declining. First home buyers are out hunting. Many parents will help their children climb the first rung of the property ladder. For those that do, we hope this article provides some useful points. As always, feel free to contact us if you wish to discuss any matter this article raises.