Gifts or loans from parents

Buying a property in New Zealand can be challenging, especially for first-time buyers who may struggle to save enough for a deposit. One option that some people consider, is using gifts or loans from their parents to help them finance their purchase. However, this option comes with some risks and implications that should be carefully weighed before making a decision.

A gift is a sum of money that is given to someone without any expectation of repayment or interest. A loan is a sum of money that is lent to someone with an agreement to repay it over a certain period of time, with or without h interest. Both gifts and loans can affect the eligibility and affordability of a mortgage, as well as the tax and legal implications for both the buyer and the parents.

If the money is a gift, the buyer will need to provide a signed declaration from their parents stating that the money is a gift and that they have no claim over the property or the repayment of the money. The buyer will also need to declare the gift to their lender and to the Inland Revenue Department (IRD), as it may affect their income tax and student loan obligations. The lender may also require the buyer to have some savings of their own, as a gift does not demonstrate the buyer’s ability to save and repay a mortgage.

If the money is a loan, it can be secured by a loan agreement or by a Deed of Acknowledgment of Debt. The buyer will need to provide a written agreement from their parents outlining the terms and conditions of the loan, such as the amount, interest rate, repayment schedule, and security. The buyer will also need to disclose the loan to their lender and to the IRD, as it will affect their debt-to-income ratio and their borrowing capacity. The lender may also charge a higher interest rate or require a larger deposit, as a loan increases the risk of default. Generally, for the bank to accept the loan they will require confirmation that the loan is interest free and that the parents will not take security for the loan.

The parents will also need to consider the tax and legal implications of lending money to their child, such as whether they need to register as a financial service provider, whether they need to pay income tax on the interest they receive, and whether they have a claim over the property if the buyer defaults on the loan.

Using gifts or loans from parents can be a viable option for some buyers who need extra financial assistance to buy a property in New Zealand. However, it is not a decision that should be taken lightly, as it involves significant risks and responsibilities for both parties.

We advise you to seek independent legal and financial advice before entering into any such arrangement and note that any money received is presumed to be a gift unless documented as a loan so it is important communicate clearly and honestly with each other about the expectations and consequences of the transaction.