A retired couple wanted to help their son into his first home.  They wanted to ‘loan’ him some money at a very low interest rate, rather than gift him money, as they wanted him to be financially aware and not reliant on ‘handouts’ from them.

The son also needed a mortgage from a bank to make up the balance of the purchase price. 

When the son started discussing things with his bank it became clear that the bank required any funds from the parents to be a ‘gift’ not a ‘loan’.  This is because having an additional loan increased the bank’s risk profile as that was an additional amount of money that needed to be paid out each week.  There was a conflict between what the bank required and what the parents wanted to do.

It has become more common for parents to financially assist their children in purchasing their first home. It is important to know what kind of arrangements you can enter into if you’re thinking about contributing to the purchase of your child’s property.

We expand on some of the options below.

Providing a Gift

You can provide a gift of money to your child.  This arrangement is preferred by banks as a genuine gift will not interfere with the bank’s security over the property, or risk profile.

However if your child is purchasing a property with their partner or spouse, a gift of money will likely be mixed up with their relationship property as your child’s partner or spouse will benefit from it. 

Assuming this is not what you want, in this case you should encourage your child to enter into a contracting out agreement to keep your gift separate from their relationship property.

You cannot force your child to enter into a contracting out agreement, and your child can’t force their partner to sign a contracting out agreement, but you may make it a condition of the gift that your child must enter into a legally valid contracting out agreement before the funds to be gifted will be paid.

You may also need to consider how providing a gift can affect your own entitlement to rest-home subsidies, as this might be considered ‘deprivation of assets’ by MSD.  A gift to your child of over $27,000 will be included in your means assessment as an asset in your hands,  as this is considered ‘deprivation of assets’. 

There is also a lesser limit of $7,500 per year for any gifts made within the five year period immediately preceding an application for a Residential Care Subsidy.

Providing a Loan

You can provide a loan to your child, and you can choose whether you provide a secured or unsecured loan.  A secured loan means you would register either a caveat or a mortgage on the title.  Banks will generally not accept you taking a mortgage or caveat unless you sign a Deed of Priority with them, confirming the bank obtains first access to the funds if there is a mortgagee sale or similar.

You can determine that the loan only needs to be repaid when your child sells their property in the future. This approach will often satisfy the bank as it provides the least interference to their security.

Otherwise, you can stipulate whether the loan is to be repaid weekly, monthly, or on demand.

If your child is purchasing with their partner or spouse, you should determine whether you are providing a loan to just your child or to your child and their partner jointly.

If your child is purchasing a family home, the loan will likely be considered relationship debt, but it is best to be clear at the outset who exactly is receiving the loan.  A contracting out agreement may be needed between the child and their spouse to properly record this.

You should also consider what the interest rate on the loan will be.  If you are providing an interest-free loan, this can also be deemed to be ‘deprivation of assets’ for the purposes of assessing your entitlement to a Residential Care Subsidy.

Whether you choose to provide a loan or a gift, it will be important to record, in writing, any arrangement that you enter into with your child. 

Guarantee

Instead of a gift or loan, parents often will guarantee their child’s bank lending, which gives the banks sufficient security to continue with lending to the child that the child would not have been able to get on their own. 

This means the parents are liable to repay the loan to the bank if the child can’t.  As this is a large undertaking parents in that scenario need to take independent legal advice.

Often in this scenario the bank will want a mortgage over the parents’ property as well as the guarantee.

Buying a share in the property

Sometimes parents will instead buy a part share of the property with their child, which gives them something to show for the funds they have put in.  This can get complicated when it comes to relationship property considerations for the child, so it pays to sign a Property Sharing Agreement between the parties prepared by a lawyer if doing this.

Helping out a child into a home sounds relatively straight forward, but it can be quite complex.  It pays to take advice from a legal professional if you are unsure about what option would be the best for you and your family.

Leading law firms committed to helping clients cost-effectively will have a range of fixed-price Initial Consultations to suit most people’s needs in quickly learning what their options are.  At Rainey Collins we have an experienced team who can answer your questions and put you on the right track.