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Jul 07 2016

A gift, but with strings attached - Inter-generational loans for first home buyers

Jul 07 2016
All News

A gift, but with strings attached - Inter-generational loans for first home buyers

Written by: Amanda Donovan

Art and Matilda  are a young couple who after a whirlwind romance, are ready to take their relationship to the next level.*

They are looking to buy their first home together. They have cut back on extravagances like helicopter flights and red roses and have been saving hard, but don’t quite have enough for the 20% loan-to-value bank requirement (LVR).

Art’s parents have generously offered to assist them to make up the difference. Art’s parents are concerned as to the viability of Art and Matilda’s relationship long term, and want to protect their contribution.

Art’s parents approach you for advice. The question then becomes how to protect Art’s parents and / or each of Matilda and Art whilst satisfying their bank’s requirements.

There are three common ways to structure the arrangements between the parents, Art and Matilda:

1. Art’s parents make a loan that is recorded in a loan agreement and secured by second mortgage over the property (noting that the bank will need to consent to the second mortgage);

2. Art’s parents take an interest in the property proportionate to the share of their contribution. So if they contribute $120K for a $600K property purchase, they are recorded on the title as registered proprietors as to a 20% share. This arrangement allows the parents to share in any potential increases (or decreases) in capital value, however this will not assist Art and Matilda with their LVR issue; or

3. Art’s parents gift the funds to Art.

Increasingly, in order to satisfy LVR restrictions set by the Reserve Bank, banks are requiring parents to provide evidence that their contribution is a gift and confirmation that they do not require repayment. The issue then arises as to how best to treat the arrangements as between the couple and the parents.

Given Art’s parents’ concerns, they may choose to make their contribution as a gift to Art only. The gift should be recorded in a Deed of Gift.

If Art applies the gift to the acquisition of a family home for him and Matilda it is going to be captured by section 8 of the Property (Relationships) Act (the PRA). In order for the gift to retain its separate property status Art and Matilda would need to enter into a section 21 agreement contracting out of the equal sharing provisions of the PRA, ring fencing the gift as separate property.
It is likely that Art and Matilda have little in the way of excess financial resources to pay for the independent legal advice required to enter into a contracting out agreement. Art’s parents may have to consider financially assisting (both parties) to meet their legal fees. Ensuring that both parties receive competent, independent legal advice is essential in order to ensure that the section 21 agreement is not challenged at a later date for lack of independence, inadequate advice and/or because it was so restrictive it had become seriously unjust. **

It is important to consider not just the bank’s requirements, but also how best to protect generous parents and/or lucky children to ensure all interests are protected and original intentions effected. Often bank’s requirements will dictate the arrangements. However, a section 21 agreement (and perhaps a property sharing agreement in the case of option 2 above) is a vital tool in recording the underlying intention of the parties.

 Please contact our Family Team if you would like more advice about this topic.

* All characters appearing in this work are fictitious. Any resemblance to real persons, living or dead, is purely coincidental.
** S21F(3) and s21J PRA