The bank of Mum or Dad

We understand that as a parent, you want to help your child purchase their first home. However, you may be concerned about the safety of the deposit you contribute, particularly in the event of a relationship breakdown with your child's current or future partner.

There are several options available to help you provide your child with the deposit required for their first home while keeping it safe from their current or future partner (and others). In summary, the options include a loan agreement, purchasing a share of the property, setting up a trust for your child, a family mortgage, and a gift with strings attached.

Option 1 is a loan agreement, which is a simple way to lend your child money for their first home. This scenario involves lending your child the deposit, and they would repay you the loan over time. A loan agreement should clearly set out the terms of the loan, including the repayment schedule, interest rate, and any other relevant details. By using a loan agreement, you'll have a legally binding document that outlines the terms of the loan and the expectations of both parties. If your child's relationship breaks down, the loan agreement will make it clear that the deposit is a loan and not a gift, and you can take legal action to recover the money if necessary.

Option 2 is where you, or your Trust, purchase a share of the property. That will provide you with security and a share of any increase in the value of the property. However, you will be liable to the Bank for repayment of your child's mortgage if they do not pay it, and if the property is sold within 10 years, you will be liable for capital gains tax on your share of the increase in the value of the property under the bright-line test.

Option 3 involves setting up a Trust with you and your child as the Trustees (or Directors of the Trustee company), with your child as the Principal Beneficiary. This will allow you to retain some control over the property and the deposit, even if your child's relationship breaks down. However, your child will not be able to make KiwiSaver withdrawals or obtain a First Home loan grant. If your child is in a relationship, relationship property issues will arise if they do not have a relationship property agreement, and are repaying the mortgage from their income, which is relationship property.

Option 4 is a gift with strings attached. If you're comfortable gifting your child the deposit, but still want to protect your investment, you can consider a gift on the condition that your child signs a relationship property agreement with their partner.

Finally, Option 5 is a family mortgage, which is a type of mortgage that's provided by you rather than a bank or other financial institution. In this scenario, you would lend your child the deposit, and they would repay you the loan with interest over time. A family mortgage can be a good option if your child is struggling to secure a traditional mortgage. However, it's important to ensure that the mortgage is legally binding and that the terms are fair to both parties.

At Ross Holmes Virtual Lawyers Limited, we specialize in property law and can help guide you through the process of choosing the best option to suit your needs. We can also assist your child with the purchase of the property: https://rossholmeslawyers.com/purchasing-a-property. We're here to help you make the best decision for you and your child.