Judy & Mike, Kate & Jack
Judy and Mike had one daughter, Kate, who was looking to get on the property ladder. Kate and her boyfriend, Jack, decided to buy a house together. They were going to pool their KiwiSaver and Judy and Mike said that they would also contribute $200,000 towards the purchase.
Judy and Mike went to see their lawyer to see what the best way of structuring the contribution was. They didn’t want to get the money back, and were going to treat it as a gift to Kate, but understandably didn’t want Jack to benefit from the money if Kate and Jack’s relationship didn’t continue. Their lawyer told them there were a number of ways to structure this.
The first way would be a loan to Kate and Jack. Judy and Mike’s lawyer advised against lending the money only to Kate as if the property was sold, Jack would benefit from Kate’s share in the equity. A loan agreement or deed of acknowledgement of debt is a very common way to record these arrangements. The loan can be interest free and payable on demand. The lawyer explained that some clients included other conditions in loan agreements, such as the requirement to get parent consent before borrowing further money, or the requirement to continue to contribute to kiwisaver.
Another way to deal with the contribution would be a straight gift to Kate. However, the lawyer recommended in that case that Kate and Jack enter into an agreement contracting out of the Property (Relationships) Act, so that Jack agreed in the event of separation, that the money gifted to Kate by her parents would be her separate property. This would be a good option if Kate and Jack had other property or assets (e.g. savings, future KiwiSaver, income) that they wanted to keep separate. It would mean that Jack would need to get his own independent legal advice.
A further option would be for Judy and Mike to take some ownership in the property. If the property price was $800,000, they could take a 25% share in the property. The upside would be that they would get some return on their investment. The downside would be that they would be expected, as a co-owner, to guarantee Kate and Jack’s borrowings. They would also need to enter into a property sharing agreement to carefully document how the ownership would work.
Judy and Mike decided to go with option one, but were so pleased that they had taken the time to get proper advice on their options.