This is becoming really common as house prices continue to climb. The situation is usually that Mum and Dad or another family member (grandparent, etc) might have a property that they will sell to the kids, possibly at a reduced price (thanks Mum and Dad!).
The first thing for everyone to consider is the value of the property and the price at which it will be sold.
Next, will the property be sold at market value or reduced? If selling at market value, it’s a pretty straightforward transaction however, in most cases, it’s a reduced price and the parents will be ‘gifting equity’ in the property.
In order to sell the property at a reduced price and gift the remaining equity, a registered valuation will need to be carried out on the property. This will give the bank certainty over the value of the property and will allow the kids to realise the equity they are to be gifted.
- Let’s say mum and dad have a property which values up at $600K but they are willing to sell it to their kids (brother John and sister Jane) for $500K. John and Jane each have $25K in Kiwisaver making up a total deposit of $50K.
- When we approach the bank for lending we want to use the $50K in Kiwisaver they have but also the equity that has been gifted to them of $100K, essentially giving them a deposit of $150K, lending of $450K and putting them at a loan-to-value ratio of 75%.
- In this scenario, a sale and purchase agreement would be drawn up at $600K and the sale will be recorded at this number but only $500K changes hands and $100K is gifted.
This is a great option for parents who are in a position to gift equity in a property (especially considering a lot of recent house price growth) and can potentially kick start their children into home ownership without needing to come up with additional cash themselves.
As usual we always recommend teaming up with the professionals - Solicitors, Accountants and Mortgage Advisers like us!
There are some important things for everyone to consider including legal and tax implications of gifting or loaning funds so each party should seek independent advice from each of these professionals before entering into any agreements.
Of course, your first port of call should be the team at My Mortgage who can point you in the right direction.