The increase in house prices and general increase in the cost of living have made it more difficult than ever for first home buyers to get onto the property ladder. It has also meant that those who already have a substantial level of equity in their homes become even more wealthy (at least on paper), as the value of their property increases.
This has resulted in more parents, and even grandparents helping the next generation of house buyers onto the property ladder. There are a number of ways this can be achieved, and in general terms, there is no single best way to do it. The best solution will be dictated by the circumstances of the individual situation.
The Loan
Perhaps the most common form of help is a loan to the family member who is purchasing. It is recommended that the loan is recognised, this can be done by way of an Acknowledgement of Debt. Terms including interest and repayments should be formally agreed. Issues arise where the loan is not documented, and the buyer enters a relationship which ends in separation. In this instance you may find the loan is not recognised for the purposes of separation and the estranged partner could claim half the equity, including the amount which was loaned. If this happens half the value of the loan will have just been gifted to the estranged partner which is unlikely to be a desirable outcome. This is where you should consider a Contracting Out Agreement.
In some cases, the property purchaser will be borrowing the maximum amount they can from the Bank and the family loan will be to “top up” the difference between their deposit, what they can borrow from the Bank/Lending Facility, and the purchase price. In these situations, the Bank may impose a “negative pledge” which means the purchaser promises that they will not borrow more from others to purchase the property. In that event, extra care will need to be taken as a loan documentation may not be possible and any advance might have to be treated as a gift. This may also give rise to a number of other issues which would need to be considered, these are outlined below.
Agreement to Advance
There can be variations on a simple loan agreement, including an agreement to advance a sum of money, and charge no interest until the property is sold, or has been owned for 10 years. At that time, a sum is repayable, which includes both the amount loaned, and accumulated interest. This arrangement would also need to be documented but can be more effective in making the purchase and servicing the lending costs more affordable.
Shared Ownership
This option enables the registered ownership interest in the property to be divided into shares which reflect everyone’s contributions. If you are contemplating this option, the following will need to be considered and resolved.
- This arrangement will have a limited lifespan. At some point in the future, it will not suit everyone to continue in common ownership, and one or more of the owners (or their estate) may want to realise their shares in the property. To deal with this issue, we recommend a Property Sharing Agreement which sets out the rules for dealing with the property and provides a fair and reasonable mechanism for exiting the ownership arrangements.
Where parents or other family members become part owners and are forced to sell their interests because of a change in circumstances, there is likely to be capital gains tax issues depending on how long the property has been held as the main home exemption will not be able to be used. - If the Purchasers/Occupiers are borrowing money from a Bank in order to purchase, the Bank are likely to insist on all named owners being included on the mortgage. You may find that not everyone is happy signing up to a sizeable mortgage on a house they do not live in, and over which they may have little control. There may be an ability to offset this risk by the Purchasers/Occupiers agreeing to indemnify the others if the property is subject to a mortgagee sale, or some form of owner liability. But there will always be an element of risk in this regard.
The Gift
A much simpler option which avoids the problems associated with owner liability and Bank lending requirements is a simple gift of funds to the purchaser/s. This is only available to those who have the means to make such a gift. It may still give rise to relationship property issues if the purchaser enters a long-term relationship, and the property becomes a family home. This is where a Contracting Out Agreement may again be needed. It can also give rise to issues within the family if the same level of assistance is not given to other family members. Depending on your circumstances it may be appropriate to recognise this issue and deal with it through the benefactor’s estate or family trust to even out the support being offered to other family members.
Conclusion
It is easy to get swept away in the dream of buying your first home and it is natural to want to help your children onto the first rung of the property ladder. However, if some care is not taken in thinking through the arrangements and putting in place some protections, things can easily go wrong. Problems which could have easily been fixed at the outset suddenly start to look more like a train crash.
The above is intended as general advice only and if you are contemplating offering financial assistance to a family member, or anyone else who is purchasing a property, we always recommend you obtain advice on the specific arrangements that you are contemplating.
For the right advice in relation to your individual situation contact our expert team.
Amanda Crehan
Director
Jacintha Atkinson-Manson
Director
