Over the last few years it has been tougher and tougher for young people to purchase their first home particularly in Auckland. With the average house price in Auckland being over $900,000 it is almost an impossible task for an individual or a young couple to save the deposit necessary to purchase their home. Therefore, a lot of first home buyers are looking to parents for financial assistance.
This assistance can take various forms but the most usual structures are as follows:
- The young couple acquires the property either jointly or as tenants in common with help from either one or both sets of parents.
- The individual child acquires the property in their own name with assistance from parents or a family trust.
- An individual acquires a property either on their own with a partner or a friend with one or both sets of parents providing a guarantee to the bank who is lending the purchase funds.
- The individual with or without their partner purchases a property in co-ownership with parents and owning the respective shares as tenants in common.
- The family trust purchases a property on behalf of a child.
Deciding which structure is best should involve a conversation between the children, the parents and a lawyer. The lawyer can be acting for either the children or the parents.
Depending on the complexity of the structure and the number of parties involved, it may be prudent for the party who is not represented to take independent advice. This is not always necessary and will depend on the particular circumstances.
It is our experience when dealing with these types of arrangements that there can often be misunderstandings on both sides as to how the property purchase will proceed. The parties do not appreciate the consequences to the parents when asking them for financial assistance. Often there could be taxation consequences, also if there are other children will they also be looking for assistance, and the structure may suit the children but not the parents.
In our opinion involving your legal advisor early in the process helps to avoid any misunderstandings and allows the children to proceed with confidence in finding and purchasing their first home. The lawyer’s role is to understand the relationship, the assistance that is required and advise the various options that are available to purchase the first home.
One of the important decisions around parental financial assistance is, will the funds be a gift or a loan? Most banks when providing a mortgage require first home buyers to have a 20% deposit. If the parents are providing all or some of this deposit it is vital that the parties understand how the bank wishes to treat this assistance. Most banks will want confirmation that the financial assistance is a gift however some banks may be happy for the assistance to be a loan provided no security is being given, it is not to be repaid until after the bank has been repaid and there is no interest payable. It is very important to establish as soon as possible what the particular bank you are dealing with will allow.
In our experience, the most important part of parents helping children purchase their first home is communication and planning. The assistance does not necessarily have to be by way of cash as it can be accessing the equity that the parents may have in their family home by way of a bank guarantee. This structure does have risks that need to be clearly understood by the parents.
If any first time buyers or parents wish to discuss options for parental support for their children to buy their first home please contact either John Stirling, Partner, or Daniel Maguire, Solicitor, at Turner Hopkins.
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Published: Wed, Jul 5th, 2017