For couples in their 20s and 30s, it is becoming increasingly difficult to save for a deposit on a home.
Luckily for some, generous parents are able to help out so their children can get their first step on the property ladder. We often see parents assisting their children in the following ways:
- Parents gift all or some of the deposit.
- Parents take an interest in the property proportionate to their share (e.g. if the property is worth $800k and the parents contribute $200k, the parents maintain a 25% share in the property).
- Parents loan the money, with the expectation that it is repaid at some point in the future.
What can go wrong?
These agreements begin with the best of intentions so often parties don’t believe they need to seek legal advice or document the agreement in the proper legal manner. However as divorce lawyers, we often see what can go wrong down the track when it turns out that the parties have a different understanding of what the agreement was and there is no written agreement to refer to.
One of the main disputes we see is regarding whether the money was a gift or a loan. This is difficult to prove either way without the appropriate signed legal documents in place. Sometimes written documentation is produced by one of the parties to establish that the amount paid in to the house was a loan, (as opposed to a gift) but there are allegations that the documents are forged.
In another situation, a house can be purchased in the parents name to get around the bank LVR rules but it is ultimately meant to be for the children, who are paying in to it and disputes over ownership can occur later on.
Issues around these agreements will often arise at challenging times such as when someone passes away or when a couple separates and the house needs to be sold.
Where there is no legal agreement, proving ownership of the home is not an easy process. It will likely require a full family court hearing with huge legal costs for all involved and may take a considerable amount of time.
Laws regarding property ownership can vary between countries so it is important that if the parents are overseas that they understand New Zealand law and the need to formalise the arrangement.
How to do it right
Once the parties work out what they would like to do, they should each seek independent legal advice and arrange for a written agreement to be drawn up which reflects their intentions and protects their interests. These documents are witnessed and certified by lawyers, so their authenticity cannot be refuted at a later date.
If the amount contributed is to be a loan, lawyers will draw up a loan agreement. If the parents wish to have a share in the property, then they can be registered on the title as having a percentage share in the property.
If parents wish to gift the amount, this can be recorded as a deed of gift to their child. However, if their child applies this to the purchase of a property they buy with their partner, then it becomes relationship property, covered under the Property (Relationships) Act 1976 (PRA). This means once the couple marry, enter into a civil union or have been together for 3 years, if they separate each person will receive a 50% share of the relationship property which includes the gifted money from the parents.
Parents may not want this gifted money shared equally between the couple if they split up. To prevent this, the couple can make a legal agreement that the PRA will not apply to them. This is known as a Contracting Out agreement (as you are contracting out of the PRA) or a prenuptial agreement.
Before signing the Contracting Out agreement, each party needs to have received independent legal advice. This prevents the contract being challenged at a later date, as parties cannot say that they didn’t understand the implications of what they were signing.
All agreements and relevant documents may need changing or updating over time as circumstances change. For example if the couple were to have children together, they may no longer want the Contracting Out agreement to apply. Another example would be if the couple purchased a further property, they might need to revisit the terms of the original loan from their parents.
With house prices being so steep, it is fortunate that family members are able to help each other with the purchase of a home. Although these arrangements are entered into with the best of intentions, there can be misunderstandings as to exactly what was agreed, and disagreements as time moves on and people’s circumstances change.
Obtaining legal advice and documenting the agreement adds to the overall expense of purchasing a home. However it is a useful process for the parties to work through their agreement in detail, examining all the pros and cons of the situation so that everyone fully understands the implications of the agreement. The cost of formalising the arrangement at the outset is significantly less than the cost involved for a Court to resolve a dispute at a later date. Formalising the agreement with help from specialist divorce lawyers will ensure the financial interests of all the parties are protected and minimise disagreements later on.