Question: My husband and I are helping our son purchase his first home. He works very hard and has saved some money, but with the current house prices has struggled to save enough to pay the deposit. My husband and I are close to retirement and we have been fortunate enough to build a decent asset base. We will be giving him $200,000 towards the purchase of this first home.

Our son has been in a relationship with his current partner for two years. They are not currently living together but intend to move into the new house together. The house will be in his name only, because she is not contributing to the purchase price. The remainder will be met by bank loan. Are our funds at risk? How we can we protect ourselves?

Answer: Your son is very lucky that you are able to support him in this purchase. You are not alone in your concerns. Lending to children to purchase property is becoming more common with increasing house prices. A recent survey shows that it can take up 10 years for people to save up a first home deposit. It also means that the "bank of Mum and Dad" are New Zealand's fifth biggest home lender, lending up to $22.6 billion in loans to adult children.

Are you at risk?

Placing the property in your son's name alone is not enough to protect your funds.

Because your son and his partner intend to live in the house together, the new house would be considered their family home. If your son and his partner were to separate, the house would be subject to equal division even though your son's partner's name is not on the title.

What could go wrong?

When parents lend to children to purchase property there is often a dispute at the end of the relationship about whether the funds advanced are a gift or loan.

When parents lend money to children, the legal presumption is that money is a gift and not a loan. This means that if your son and his partner were to separate, you would not get your $200,000 back.

To deny this assumption and to protect yourselves it is important that there is proper documentation to show an intention that the money should be repaid some time in the future. This can be done in a number of ways:

1. Deed of Acknowledgement of Debt

The easiest way to protect yourselves is to execute a Deed of Acknowledgement of Debt at the time of lending. This is a document that records the loan between yourselves and your son.

It is a relatively short and simple document that is drafted by a lawyer and signed by you, your husband and your son. It acknowledges that there is an intention for repayment. It would also cover what interest rate, if any, is charged on the loan and the timeframe for repayment. Most Deeds of Acknowledgment of Debt of this nature are repayable on demand or on sale of the property.

There is no requirement for your son's partner to sign the Deed of Acknowledgement of Debt or even be aware of the document.

If your son and his partner were to separate, the Deed of Acknowledgment of Debt would be produced to request repayment.

However, parents will only be able to recover the initial deposit amount. They will not be entitled to any increase in the value of the home. A Deed of Acknowledgement of Debt requires the parties to have independent legal advice.

You should seek legal advice before signing a Deed of Acknowledgement of Debt and you will need to balance protecting your interests for repayment with any bank conditions for lending. We often find that banks will generally require that the Deed sets out that:

• There is no interest payable

• The money is only repayable upon sale of the property (rather than repayable on demand)

• The parents won't take a charge/security over the property

2. Caveats

In addition to the Deed of Acknowledgement of Debt, parents can lodge a caveat over the house. A caveat is a document which is lodged against a title which prevents your son from selling or disposing of the property without taking your interest into account. The caveat protects your interest even if the relationship between you and your son were to break down in the future.

The caveat should be lodged in conjunction with the Deed of Acknowledgement of Debt.

3. Property Sharing Agreements

Another way to protect your interest would be take ownership in a share of the house. Your names would be recorded on the title and a Property Sharing Agreement would be executed at the same time to recognise your interest in the property.

The property sharing agreement sets out who is going to pay the outgoings and also mechanisms in case the house is to be sold. Further, if your son or his partner are to buy you out, it would state how this would occur.

The benefit of this approach is that your interest would change depending on any increase in value of the property.

However, Property Sharing Agreements are more involved than Deeds of Acknowledgements of Debt and are therefore more expensive to prepare and execute. It can also take a number of months to formalise it given the number of parties involved.

4. A Contracting Out Agreement

Your son and his partner could enter into a Contracting Out Agreement. As you say that the entire purchase price is being met by way of his funds, your funds and a bank loan, I would strongly suggest that your son sign a Contracting Out Agreement with his partner.

The contracting out agreement should refer to the funds that have been lent by you and your husband and outline the division if they were to separate.

However, the Contracting Out Agreement is executed between your son and his partner. You will not be a party to this Agreement.

A Contracting Out Agreement can take weeks or even months to execute but it ensures transparency. Both your son and his partner will need to hire independent lawyers to certify and witness the agreement

Contracting Out Agreements needs to be updated over time to make sure that they reflect current circumstances. If they are not updated, they can risk being overturned.

Summary

Helping your child onto the property ladder can be a rewarding experience but it does come at a risk. No matter how strong your relationship is with your child and their partner, ensure any agreement is well documented and obtain legal advice to avoid serious complications in the future.

This article was first published with the NZ Herald.

‍