How can a Deed of Acknowledgment of Debt help my kids buy a home?
It’s a challenging time out there for first home buyers, and ironically not from over inflated house prices! Getting money off the banks these days for your first home can be a struggle. More and more, the ‘bank of mum and dad’ are being called in to help in some way.
We see more often these days parents wanting to help their kids into their first home but maybe feeling uncomfortable gifting cash. Gifting cash can have tax implications but also once the cash is gifted, it potentially becomes relationship property. Meaning if one of your kids has a bogus partner, they could walk away with half that gift in the future! (This is a slightly cynical worst-case scenario!)
So probably one key bit of advice is having your kids and their partners look at a relationship property agreement, especially if the money each of them have going into a property purchase is uneven.
Whilst being a guarantor can be an option for parents, it does mean a bank doing a full assessment of the parents financial position and therefor comes with other challenges. Parents may be ‘asset rich’ and ‘cash poor’. If parents are just on a pension, have minimal employment income and/or have a reasonable sized mortgage themselves, there needs to be another option.
Let’s assume the parents want to help out with some cash but they don’t want to gift it. They may even want that money paid back at some stage for their retirement.
Then try considering a simple document called an “Acknowledgement of Debt” or “Deed of Acknowledgement”. It’s like a loan, with no repayments or interest charged. It can also be used with gifted equity (typically when a parent sells the kids a home, they own for under market value).
Occasionally retired borrowers may raise a reverse mortgage to help out the kids but seek appropriate advice in these circumstances.
Wording the banks usually prefer is along the lines of: “The debt is non-interest bearing and does not require regular repayments. The debt is to be repaid on the sale of the property being purchased or earlier by full 1st mortgage refinance or mutual consent with bank permission. There will be no encumbrance placed on the title”.
This can be a great way for parents to help kids rather than just gifting money and running the risk of a bogus partner getting half the cash in a marriage split.
Another key bit of advice is to get your kids into KiwiSaver early, no matter how young they are! Even if you can afford to contribute say $25-50 a month into their KiwiSaver, they are getting a head start on their long term savings. This potentially eases the burden on you as a parent financially down the track.
Seek legal/accounting advice around estate planning and/or tax advice.