Part Nine: Bank of Mum and Dad
Trivia question: who are the top five largest housing lenders in New Zealand?
Answer: ANZ, ASB, Westpac, BNZ and…the Bank of Mum and Dad. More than 200,000 Kiwi parents have doled out $22.6 billion in loans (Consumer NZ).
Getting into your first home is much more challenging than it was a couple of decades ago. In the 1980s, the average New Zealand house price was 3-4x the average annual household income - in line with international standards for housing affordability (Generation Rent). Now, it’s 8x across the country and almost 11x in Auckland, where a third of all Kiwis live (interest.co.nz). This, combined with rising interest rates and stricter lending rules, is leading to more parents contributing to their children’s first home deposit.
We recognise that this makes it less equitable when it comes to who gets to buy a first home and that there’s a much bigger discussion to be had on how policymakers and industry leaders address this problem.
The focus of this article is on how parents can give money in a way that reduces the chance of future family conflict, which can range from squabbles to all-out court cases. The last thing any parent wants is for their generous gesture to result in division and resentment.
In our asset and estate planning guide, we use 🚨 to denote points that are specific to parents. Well, this entire article is relevant to parents, so we won’t bother denoting every point! 🚨🚨🚨
Gift or Loan?
If you want to give money to your child to help them purchase a home, there are two ways you can do this: as a gift or as a loan. Often recording the money given as a loan provides parents with greater protection. However, what will be appropriate for you will depend on your individual circumstances.
If you have a strong relationship with your child, you might think this is unnecessary; after all, you love and trust each other. So why might a loan - with the hassle of setting it up - be more advantageous than simply gifting it?
Let’s run through the pros and cons of the loan approach. Note that the pros and cons of a gift are different sides of the same coin.
Advantages of the loan approach
It’s easier to treat all of your children fairly and equally.
If you have more than one child, you may find that your children require different amounts at different points in their lives, and perhaps some may require no financial support at all. Having the money recorded as a loan means that when you pass (or when both you and your partner pass if you jointly provide the funds), the loan will have to be repaid before your estate is distributed to each child. The repayment will likely be done “on the books”, so no physical transfer of money occurs, but it means that if one sibling has benefited from a larger loan than other siblings, then they will receive less funds from the remaining estate as recognition of this. For many families, this is a more equitable outcome.
You have control over the funds.
The loan allows you to demand repayment in the future if necessary. This might be appropriate if:
Your financial position changes, and you find yourself needing those funds for your own living costs
Your child seeks to use the money inappropriately. For example, they sell their house and want to use the money to fund a gambling addiction
Your child and their partner separate and are in a relationship property dispute (more on this below)
If you gift the funds, once the money lands in your child’s account, they have free reign to do whatever they like with it. In an extreme case, they could decide not to buy a home and do something entirely different. With a loan, you can stipulate that the funds can only be used to buy a specific property.
You have protection against future scenarios.
Since the loan is debt owed by your child:
It is not available to creditors in a creditor claim
It is not available to a partner in a relationship property claim
If your child dies before you, then you could ask that the loan be repaid. If instead, you had gifted the money to your child, then it would become part of their estate and pass to the person or persons named in their will or distributed in accordance with the law if they don’t have a will - either way, it might not be who you want the money to go
If you gift the money, it counts as your child’s asset. This means their partner or creditors could potentially make a claim on it.
Structuring your contribution to the house deposit as a loan gives you more options. The loan does not need to be on commercial terms. For example, it could be interest-free and not subject to security. Furthermore, you can change your mind and choose to forgive this loan in the future. However, if the money is gifted, you cannot change your mind and make it a loan down the track.
Disadvantages of the loan approach
In addition to recording the financial support as a loan, Sarah also suggests that you secure the loan by a first lien, i.e. you are paid back before all other debt holders. If a bank is also lending money (which is very likely!), you can request to be the second lien, i.e. you are next to be paid back after the bank.
This leads us to the major disadvantage of the loan approach – complying with the banks’ strict requirements. In Sarah’s experience, banks are often very reluctant to have money that a parent provides for the home deposit recorded as a loan and even more reluctant to let a parent register a second lien.
Banks prefer it when the funds are gifted because it enhances their position in the event of default (i.e. if your child falls behind on their mortgage repayments). Some banks go so far as to require the parent to sign a legal document confirming the money is a gift.
There is a potential middle-ground solution: the bank allows the money to be recorded as a loan if the loan agreement expressly states:
The loan from the parent is and always will be interest-free;
The parent can only demand repayment of the loan once the house has been sold and the bank’s loan has been fully repaid first; and
The parent agrees not to register a lien, which provides the bank with the comfort their loan is secured and will be repaid first.
While this doesn’t provide you with watertight protection, it’s still generally preferred over gifting the money.
The partner!
Your kid has found love, and now they want to buy a home together with their partner. Should the loan be to your child only? Or to your child and their partner jointly?
The answer depends on where the money is coming from.
Money is coming from a family trust: there may be restrictions on who can receive the loan if it’s on uncommercial terms (e.g. interest-free and not subject to security). In this case, the only option may be for the loan to be provided to your child only. However, this will depend on the terms of the family trust deed and the proposed terms of the loan.
Money is coming from a parent personally (or if the family trust deed permits it): it is generally preferable if:
The loan is made to both your child and their partner
The loan is recorded in writing in a loan agreement
Your child and their partner receive independent legal advice with respect to the loan and loan agreement.
This structure makes it clear that the money is a loan - and not a gift - and therefore a ‘relationship debt’ under New Zealand relationship property law (see our article here). This means that if your child and their partner separate, the loan needs to be repaid before the relationship property is split between them. The funds will, therefore, not be lost to an estranged partner.
What’s next?
This article is intended to be a general guide only. If you decide you want to give money to your child for a house deposit, how this should be structured, to whom the loan or gift should be given, and on what terms will depend entirely on your personal circumstances.
The best thing that you can do is to talk to your lawyer before a single dollar leaves your account or any bank documentation is signed. With property purchases, time is often of the essence, but lawyers can move fast to ensure things are structured in a way that will protect not only your interests (as the parent and provider of the funds) but also your child’s.
This is part of Crayon’s mini-series on asset and estate planning for parents:
Now for the important legal part: The information we provide is general and not regulated financial advice for the purposes of the Financial Markets Conduct Act 2013. Please seek independent legal, financial, tax or other advice in considering whether the content in this article is appropriate for your goals, situation or needs. The information in this article is current as at 3 February 2023.
All of our content is independent. Crayon provides you with accurate and valuable information you can use to make smart money moves for your family. We work with people we respect, and all collaborations are unpaid.
Sarah Kelly
Senior Associate, Private Wealth team at Dentons Kensington Swan
Stephanie Pow
Founder and CEO, Crayon
