Lessons Learned from the Bank of Mum & Dad.

Many young people can only get onto the property ladder with a leg up from Mum and Dad. For parents who can, a financial contribution is a wonderful way to secure their children’s future. However, there are a number of potential pitfalls, a tough lesson that John, Pam and their daughter Stacey learned the hard way.

John and Pam were by no means wealthy, but they were in a comfortable financial position entering retirement. The family home had become too big, so they decided to downsize to a townhouse, using some of the difference in value to help their daughter and her new husband into their first property. They had been concerned for some time that the couple wouldn’t be able to save enough for a deposit without their support.

Recently married, Stacey and Matt found a two-bedroom unit listed for $1m, perfect for their first home. Between their savings and Kiwisaver, they had enough for a 15% deposit. John and Pam offered to lend them $150,000 which would boost them to a 30% deposit, leaving them with a $700,000 mortgage.

Stacey and Matt went to see a mortgage broker who said that the bank wouldn’t accept the money as a loan from John and Pam – it had to be a gift, otherwise it wouldn’t be included as part of their deposit. Stacey and Matt were eager to get their offer in quickly – even though the market had slowed, there were still very few properties in their price bracket. So, in the rush to make an offer, John and Pam made the mistake of not seeking legal advice. They simply signed a gifting document supplied by the broker and handed over the money. The offer was accepted and soon Stacey and Matt took ownership of the unit.

Initially, the couple were very happy in their home. However, about two years into their marriage, cracks started to appear. Finances were tight and they started arguing about money. Stacey wanted to start a family, whereas Matt still liked the life he had at university – out late night and the pub with his friends and not ready to be a family man. Eventually Stacey and Matt agreed to separate, sell the unit, and move on.

The unit was sold for $1.2m, $200,000 more than what they paid for it. When Stacey went to see a lawyer, she explained that her parents had put $150,000 into the house. Her expectation (and John and Pam’s) was that the money would be repaid or at the very least, Stacey would take the $150,000 in priority to Matt.

However, Matt’s lawyer advised him that when the money was gifted toward his and Stacey’s family home — a relationship property — it had become “intermingled” and he was legally entitled to half of it.

John and Pam were shocked to say the least. They consulted Stacey’s lawyer to find out what, if anything, could be done and what they could have done differently to avoid this situation. She told them the truth - that they should have sought legal advice at the time of gifting the money.

She explained that banks will accept limited loan agreements rather than gift documents in these scenarios. By that she meant a loan agreement where it is agreed that the loan won’t be called up unless the property is sold and the lender won’t register any security (e.g a caveat) against the property. This agreement would have been signed by Stacey and Matt. Alternatively, to gift the money (if there was no intention for it to be repaid) to Stacey, she and Matt would have entered into a “contracting out agreement” ensuring that the money gifted by John and Pam would remain Stacey’s separate property.

In the end, Stacey tried appealing to Matt’s better nature, but the relationship was so broken, and Matt was so angry and bitter, he refused to walk away with anything less than his legal entitlement.

There are many ways of structuring loans and gifts from The Bank of Mum and Dad. Seeking sound legal advice is the essential first step in understanding your options and protecting your family investment.