The Perils of Parental Lending

It has become increasingly difficult for first home buyers to enter the property market in New Zealand. The amount of deposit required in most regions has increased significantly, with house prices growing at a fast rate in comparison to peoples’ incomes. Banks have put tighter controls on low deposit lending and a flow on effect is large numbers of first home buyers purchasing properties with the help of their parents. This is usually by them either acting as a guarantor on the mortgage or advancing funds as a gift or a loan to help with the deposit.

With this increase comes the rise of family relationship property disputes particularly when the relationship of the child and their partner breaks down. A recent court decision highlights the need for parents who are assisting their children, to consider documenting the loan if they want the money to be repaid (but more so by the child’s ex-partner) if the relationship ends.

Gift or Loan?

Legally, the presumption is that any money given to children is a gift and not a loan. This can be refuted if there is information to show that at the time of the advance there was no intention to transfer beneficial ownership of the property. A loan agreement would be strong evidence of this.

In Zhang v Li the husband claimed that the $355,000 given to them by his wife’s parents to purchase the house was a gift and as such he was entitled to half when the relationship ended.

In the absence of any document formalising the parents intention in regards to the money advanced, the Court had to consider all factors surrounding the nature of the advance. Ultimately the Court said the money was in fact a loan for the following reasons:

  • No representations were made - they never stated money was a gift
  • Size of the advance - it was accepted the money was a large part made of their retirement savings so more unlikely that it was a gift.
  • Reason for the advance – to help the daughter acquire a family home which they would share when they moved to NZ to retire.
  • Cultural factors – documenting intra-family advances is considered disrespectful in Chinese culture.

If you are thinking of gifting money or advancing a loan to your child (and their partner) for a house purchase, bear in mind that if the relationship breaks down and you don’t have a loan agreement, the money advanced in most cases becomes relationship property, to which both parties are entitled to a 50/50 split. Please talk to us if you want to protect your interests.