The Do’s and Don’ts of Lending Money to your Children

We recently heard of a case where a parent lent their child $50,000 as payment of the deposit on a property. The mortgage broker provided a gifting certificate for the parent to sign to help with the mortgage application, but actually the arrangement was meant to be a loan not a gift. Signing this certificate unfortunately set them up for failure when the relationship between the child and their partner later broke down.  Even though there were text messages from the partner agreeing that it was a loan, when it came to the crunch, they denied it and avoided repayment when the relationship ended.  

There are three ways to protect funds when trying to help your kids get a step-up onto the property ladder.   

Don’t give them the money – make it a loan! 

We recommend entering into a loan agreement recording the terms of the advance and to secure repayment later on.  In order to get finance approved by the bank, the terms of the loan agreement will need to state that the loan is interest free, that there are no repayments during the term of the loan and that the loan can only be demanded for repayment when/if the property is sold.  A simple deed of acknowledgement of debt signed by both your child and their partner will secure repayment of the debt on the later sale of the property. 

Gift the money conditional upon the parties entering into a Contracting Out Agreement 

If you do want to make it a gift and have no expectation that it is ever to be repaid, but you want your gift to go to your child and not lose half of it if their relationship ends, then your child and their partner could enter into a Contracting Out Agreement (also called a S21 Agreement or Property Relationship Agreement – or if you prefer the American term, a pre-nuptial agreement).  Such an agreement contracts out of the Property (Relationships) Act 1976 which would otherwise provide a presumption of 50/50 sharing of relationship property.  Often these agreements are entered into when one party to a relationship has significantly more deposit to pay towards the purchase of a new home.  These agreements can be very narrow, and only deal with the deposit (i.e. all capital gains are shared equally notwithstanding the unequal contribution); or the agreement can be more complex and provide for more separate property such as kiwisaver, superannuation, business interests, income, other property, an interest in a family trust etc). 

Jointly purchase the property with them 

This option used to be more feasible but unless you are going to jointly occupy the property, then you could be hit with a capital gains tax when they try and buy your share from you later on.  Further, if your name is on the title then in most cases you will need to be part of the finance application and be jointly and severally liable for the loans owing to the Bank.  The complexity of these two issues make this joint ownership in most cases unworkable but not impossible. 

The best option for everyone will depend on the specific circumstances. So it’s best to get some advice sooner, rather than later.

We can help you understand how you may be affected and suggest the best option for your circumstances. 

Debra Barron is a qualified Barrister and Solicitor and Principal of ClearStone Legal.

p: 09 282 4192

e: debra@cslegal.co.nz