Talk about a hot spot. The old adage “neither a borrower nor a lender be” is all good in theory – until you’re a doting parent confronted by your desperate, cap-in-hand child, all too aware you hold the only key to them getting into their own home.
The latest property boom has seen the price of entry-level homes in the Queenstown-Lakes area skyrocket to about $700,000. So, today’s first-time buyers are looking at an eye-watering $140,000 to meet banks’ requisite 20 percent deposit. Not surprisingly, for many, squirrelling away anything like that poses the budgeting equivalent of scaling Mt Everest in high heels.
And, of course, the deposit’s only the first hurdle. Then there’s the loan to service, rates, insurance and general property upkeep. Unfortunately, pay packets haven’t kept anywhere near pace with the sizzling-hot real estate market. Cue what is, for many, the only available financial shoulder ride to that first rung of the property ladder: The Bank of Good Old Mum and Dad. Nowadays, well over half of the first homebuyers we work with are relying on help from parents, or, on occasion, other family members or friends.
Recently, I worked with a couple and the wife’s parents who represented the gold standard in how to navigate “family helping family” get into a first home: all parties were organised, well-informed and on the same page before the first homebuyers even stepped foot into an open home.
Due diligence
Their first critical step was booking an appointment with me, so we could ensure all the initial legal ducks were in a row, and safeguards identified, before the couple went to the bank to seek pre-approval for a loan.
First up, the parents had agreed to offer some financial assistance with the meaty deposit. But was it a loan or a gift? If the expectation is that a contribution will be repaid, the bank will consider it a debt, which likely won’t help a loan application. So, if it’s a gift, the bank wants that confirmed by way of the parents signing a statutory declaration – a gift certificate – stating the funds do not need to be repaid.
As part of our session, we also needed to talk through a bit of an uncomfortable one – what if the first homebuyers’ currently very loving relationship ended? Wouldn’t the gifted amount be automatically ring-fenced for the wife, given it was her parents who had given it? Ah no, was my answer.
By signing the gift certificate, the stated amount would automatically go into the relationship property pool, which would be split 50-50 in the event of the marriage ending. In this case, the couple agreed to a contracting out agreement (a pre-nup) stating that, if they broke up, the amount of the gift for the deposit would be ring-fenced for the wife as her separate relationship property.
What exactly are you covering?
The daughter had also brought to our meeting a copy of the bank’s standard “all obligations, unlimited guarantee” form for guarantors. What most guarantors don’t realise is that by signing that document as is, they are taking on responsibility not only for their loved one’s home loan, but for all other current and future debt until the guarantee is formally discharged. What’s more, the bank will not, as of right, keep the guarantor informed of anything – unless it’s a demand for urgent (typically within a month) and full repayment of their loved one’s debt, should they go into default.
Commonly, would-be guarantors are presented the form at the very last, pressure-cooker moment, and left with little option but to either sign on risky terms, or watch their loved one’s home loan application – and, sometimes, dream home – fall through. Fortunately, in this case, we were able to methodically work through the onerous responsibilities guarantors carry well ahead of time, and identify appropriate safeguards, tailored to their particular needs and circumstances.
My “gold standard” family decided to include in their agreement that the parents would receive regular loan statements from the bank, and that they would also have the log-in for the home loan account, so they could see exactly what was happening at any given time. The parents opted to specify a monetary limit they would guarantee, as well as an agreed fixed term.
I cannot stress how important it is to ensure that guarantors stay across their liability and that guarantees are formally discharged. Ultimately, though, what limits can be included are at the bank’s discretion, so you need to be having these discussions as early on in the process as possible.
This is the house that love bought
Unfortunately, my “gold standard” family is not the norm. Often, families eschew an hour or so of a lawyer’s time simply to avoid what is a pretty minor cost. Considering these arrangements involve hundreds upon hundreds of thousands of dollars, and the high risks at play – which can be relatively easily, cheaply and quickly mitigated with good legal support – this is false economy at its worst.
For the most part, guarantors put their own financial security on the line purely out of love, with no payback whatsoever, other than the feel-good factor. The best way for the recipients of this incredible generosity to respect and repay that kindness is by getting their financial and legal house properly in order before hitting the open homes.
There’s nothing more heart-warming than seeing these arrangements set first homebuyers up for life, and little more heart-breaking to watch when they fall apart – especially when a disastrous outcome could have been avoided.
