The hardest thing for many younger couples, especially with property prices way up there, is getting the deposit together to buy in the first place.
Once that part is sorted, the rest of it is relatively smooth sailing because our erstwhile young couple are both earning and can afford the loan repayments.
Its just that pesky deposit! Okay the banks are allowed to loan money to a few more people below the 80% LVR threshold now than they were before the new year, but in some parts of the country (like Auckland and Queenstown) the 20% or 30% deposit is still a pretty big number.
Enter the Bank of Mum and Dad.
Mum and Dad have the money and want you to do well in life. So of course they are going to help if they can. But don’t, please don’t, fall into the trap of thinking its just a family thing and there’s no need to record the arrangement. That is a mistake, and in some cases its just inexcusable.
Take this example which popped up in the High Court this month:
W and F had been in a relationship since 1997. Not a perfect relationship from all accounts, but then whose is.
Anyway they couldn’t afford a house because they couldn’t get a mortgage due to F’s bad credit history. Plus they didn’t have any money for the deposit.
So along came W’s parents. They were able to help out by raising the money, but the bank required them to be mortgagors along with W (the bank didn’t want F as mortgagor because of his bad credit record).
In other words, W’s parents became the owners, alongside W, of the property which W and F would live in as their home, and were registered as owners on the title accordingly.
W’s parents were prepared to do this as long as W and F paid all mortgage payments. Agreed by W and F. All good so far.
Anyway things must have got tough because a couple of years later F disappeared and left W and the kids to it. He also left W to make the mortgage payments herself, which she couldn’t do, and eventually the bank decided it was time to stop the bleeding and sell the property.
At this point W’s parents stepped up and applied to Court for a division of the sale proceeds for when the property sold. They wanted two thirds and more for themselves, leaving a paltry amount for W, who would no doubt have to share that with F under relationship property law. Lucky for them all, the property had actually gone up in value between the time they bought it and the date it was sold.
So even though the problem resulted from F’s disappearing act, it ended up being W fighting with her own parents over what was left. Very sad.
The Court had to decide who should get the sale proceeds. Their starting point was (and always is) to look at who is registered on the title. The title showed W and her parents as tenants in common in third shares each.
However – and if you are a parent wanting to help out, please listen closely – on an analysis of the facts the Court decided that W and F were the beneficial owners of the property and therefore entitled to the bulk of the net proceeds of sale.
The Court’s reasoning is quite clear:
W’s parents agreed to become owners solely to assist W and F to obtain a mortgage so they could buy the home. Very generous of them, but “driven solely by the obligations they felt they had to W and F as members of their family.”
The parties all proceeded on the basis that W and F would have full responsibility for paying the mortgage. This is consistent with the intention that W’s parents were only on the title to help W and F get their own home.
W’s parents could not argue that it was an “investment” on their behalf. If it had been they would have been more proactive in protecting their investment when the bank was looking to foreclose.
Further, if W’s parents were experienced investors they would have recorded the commercial arrangement in some sort of a Property Sharing Agreement. No such document existed.
Lastly, W’s parents approach to securing the bulk of the sale proceeds for themselves only arose after F had left their daughter W. Otherwise the Court does not believe the issue would even have arisen.
So what is the take home message?
Its this: You can go two ways with these arrangements – the easy way or the hard way.
The easy way is you get an Agreement in place. Be very clear about whose money is going into the property, whether it is a loan or whether its in exchange for a share in property ownership, who pays the mortgage and other outgoings on the property, what happens if one or other party wants to sell, and who gets any capital gain (or shares in any loss) on sale.
Exactly the same applies if you decide to team up with friends to get on the property ladder.
Here, if an Agreement had been in place, the issue could have been resolved without any great drama.
Whats the hard way?
Well, it’s a day in court, that’s what. Because no agreement is in place. At huge cost. Cost that need not have been incurred. That’s the hard way.
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