The Bank of Mum and Dad
According to Consumer NZ, $22.6 billion in loans have been made by the Bank of Mum and Dad, or "the BOMD." This translated into an average contribution of $108,000 from 208,638 parents. You might consider borrowing money from a family member if you are in a position where you have the serviceability (the capacity to meet good levels of borrowing) but need a larger deposit. This implies that you could buy a house and borrow the deposit from BOMB instead of having some or all of it saved. After a while, you might consider refinancing and using your savings or the equity you have gained in the property to pay back the deposit loan. If it is planned and structured correctly, this can be an effective way to get onto the property ladder. Without it, it can have serious legal and emotional repercussions and tax impediments.
One way to look at it is that the money you were using to save for a deposit can now be used to repay the loan on the deposit, while the money you were previously spending on rent is now going towards your mortgage and other household expenses. Your first course of action should be to get your financial situation assessed by your bank, or better yet, a mortgage adviser. It is crucial that all parties get independent legal, financial, and tax advice before putting any possible structure into place or sending money.
The type of assistance typically provided by the BOMB could be one or more of the following;
- Contributing towards the deposit
- Acting as guarantor
- Buying a property in partnership with them
- Buying a property on their behalf
Contributing towards to deposit
The manner in which any money is contributed to the deposit must be explicitly documented. If the family member gives the money, they should be aware that it will be considered when they apply for a residential care subsidy. Both parties must remember that there may be problems with their property relationship if the child who received the loan or gift separates from their partner. The child signing a Contracting Out Agreement and the gift or loan being properly documented are the only ways to stop this claim. For these reasons, having a lawyer draft this is a good idea.
Acting as guarantor
Your lender (i.e., bank) may ask some family members to serve as guarantors on the loan and pledge their home as collateral. In the event that the borrower defaults on the loan, the guarantee is enforced. This could be because you die, have a medical condition that keeps you from working, or start a new relationship that doesn't work out. If the bank ever enforces the guarantee, the family member may suffer serious consequences, including losing their home. It is necessary to inform a guarantor of their liability and the date of their release from their responsibilities. Independent legal counsel is required for all parties.
Buying a property in partnership with them & buying a property on their behalf
It is crucial to talk about your ownership structure, financial responsibilities and contributions, how to obtain legal advice, when and to whom you intend to sell the property, and what would happen in the event of a change in circumstances if you are buying a property jointly or on your child's behalf. Buying the property on your child's behalf may have major tax repercussions.
From here
Feel free to get in touch with our team to see if we can assist you with your purchase.
