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Family Help with a House Deposit? Gift or Loan?

Given the property market in recent times, and higher deposit rates required by banks, it is relatively common for parents to help their children out with the deposit for a house.  It is very important to think about whether this help is given by way of gift, or loan.  There can be very different consequences.  Often, at the time, everyone thinks they are on the same page, but if a relationship breaks up or finances get tight for anyone involved, up it is very difficult to be certain – and to have your interests appropriately protected - without written evidence.

A common example is James buys a house with the help of $100,000 from his parents.  It isn’t discussed at the time, but comes out afterwards that James thought it was a gift, and his parents thought it was a loan (they had been factoring it in to their retirement fund).  Not long after purchasing the house, James’ girlfriend Rachel moves in.  Once James and Rachel have been together for over three years, if they separate Rachel could have a claim on 50% of the house, including the $100,000 contributed by James’ parents.  

To avoid the confusion and upset that this sort of situation can cause, there are a number of options including:

  • - Loan: A loan agreement should be entered into between James and his parents. This records the debt of $100,000 and gives James’ parents the ability to enforce it.  It can clarify the terms (i.e. interest, period, repayable upon sale of house, repayable on demand etc.).  If the parties want, this debt can be registered on the title of the property, similar a bank mortgage. 
  • - Gift: If the money from James’ parents is a gift, then James would need Rachel to sign a Contracting Out Agreement. This would record that the $100,000 is James’ separate property (and/or it could also record that the house is James’ separate property).               
  • - In the scenario where Rachel and James want to buy the house together, if the $100,000 is a loan it should still be recorded between James and Rachel as Borrowers, and James’ parents as the Lenders, and in the event of a relationship split between Rachel and James, they are each liable for half the debt. If it’s a gift to James, then this can all be recorded in a Contracting Out Agreement.  The Agreement would ring-fence James’ separate property share which is made up of the $100,000 gift and his contribution to the purchase price, and Rachel’s separate property contribution to the purchase price, and also set out how any increase in value and costs will be treated between James and Rachel.  

Having it recorded ensures that everyone involved is clear about the arrangements from the outset.  It doesn’t need to be complex, or expensive, but becomes particularly important if there is a relationship break-up later on; all parties are clear as to how the $100,000 is treated between James and Rachel.  Or, if something happens to James’ parents, when it comes time to sort out the assets and liabilities of their estate – especially if James has siblings – it is crucial to know if the $100,000 was a loan or a gift.  If there is no record and the dispute ends up in the Family Court it can be expensive, stressful and time-consuming for everyone.

We can help you clarify, and record, what the best approach is for you and your family

  • Posted By: Laurel Simm on Wed, 26th Jun 2019 @ 07:53:34

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