By: Brianna Freebairn & Miriam Betts
Brianna and Miriam are the trusted faces of first home buyer guidance at Freebairn & Hehir, having carved a niche in the Manawatu for their insightful, transparent and understanding services tailored specifically to first-time homebuyers.
We’ve had the pleasure of assisting many first-home buyers navigate the exhilarating yet often daunting process of buying their first home in Palmerston North or the Manawatu over the years.
Parental help is a common aspect of this experience. Children often need a “hand up” to get onto the property ladder. The role of parents as lenders has greatly increased over the years. If a “Bank of Mum and Dad” actually existed, it would be one of New Zealand’s top residential lenders.
It’s a commendable act, but be aware of the issues
Lending to your children for their first home is a generous and life-changing act. However, it’s crucial to ensure you are well-protected when doing so. There are many potential pitfalls, and not all of them are financial.
Avoid outright gifting where possible
The simplest option often seems to be just giving the money. But this poses numerous issues. What if your child is in a relationship that subsequently ends? What if your child faces business risk and the equity you’ve gifted ends up in the hands of creditors?
Consider a loan – and take security
A safer approach is to document the assistance as a loan. You can make it interest-free and repayable on demand. If your child has a partner, they should sign the loan agreement as well. Then, in the event of a separation, you can call up payment.
Banks may prefer an outright gift. But even when the bank does say this, it’s often our experience that they will agree to a loan instead. Sometimes this will be on the condition that you agree not to call up the loan until the property is sold.
You should also reserve the right to register a mortgage over the property. This gives you the ability to become a secured creditor. Your security will rank behind the bank’s, but you’ll be in a much stronger position than an unsecured creditor if things go wrong.
Exercise caution with guarantees
Parents are often asked to guarantee the debts of their children. But these should not be entered into lightly. The potential liability you can incur under these arrangements is, by default, unlimited. Usually, you can negotiate a limit. Even then there are risks involved that you need to understand.
Trusts add an additional layer of complexity
Many Kiwis place their assets in trusts and it’s often these trusts which are called upon to provide assistance to first-home buyers. To protect themselves from claims against beneficiaries, trustees need to justify any assistance provided to children. This means checking the trust deed and considering the best interests of all beneficiaries.
Seek advice from a lawyer
The need for independent advice might seem like a hindrance. However, it’s the only way to ensure that you fully comprehend the risks involved in providing financial assistance. That’s why your child’s lawyer will insist on you seeing an independent lawyer to sign off on the arrangements.
Enter into it with your eyes wide open
As lawyers, it’s not our job to stop you from helping your children. Assisting a child to acquire their first home is a satisfying and fulfilling experience for many parents. You just need to be aware of what you’re doing and what you’re potentially putting at risk.