Loans from the bank of Mum and Dad: Helping kids into property

Jenny and Bruce wanted to help their son Paul and his wife Emily into their first home. Paul and Emily had saved $80,000 and were taking out a home loan with their bank. Jenny and Bruce had talked about contributing $150,000 towards the purchase. They had discussed it as a family but weren’t sure about the best way forward. Jenny and Bruce decided to meet with their lawyer. Their lawyer advised them that there were a couple of ways they could structure their contribution, but that the options would largely depend on what the bank would agree to.
The first option would be for Paul and Emily to purchase the house with Jenny and Bruce as tenants in common. This means that Paul and Emily would own a share in the property, and Jenny and Bruce’s contribution would buy them a share in the property as well. They could have a property sharing agreement drawn up by their lawyer, which would state the contributions they each made to the purchase, and who would be responsible for which outgoings, including mortgage repayments. It would also state what would happen if the property was sold. In the future, Paul and Emily could buy out Jenny and Bruce’s share.
Their lawyer advised that if Jenny and Bruce were going to be on the title, the bank would probably require them to be co-borrowers. Jenny & Bruce were not keen to be co-borrowers of the bank loan, as Bruce was retiring in six months. Their lawyer explained that the bank may not require them to be co-borrowers, if Jenny and Bruce gave a guarantee in respect of Paul and Emily’s borrowings. Jenny and Bruce weren’t comfortable with that, since if Paul and Emily couldn’t repay their loan, the bank would come to Jenny and& Bruce for repayment.
The second option to record Jenny and Bruce’s contribution, was a deed of acknowledgment of debt; a kind of loan agreement between Jenny and Bruce and Paul and Emily. Paul & Emily would go on the title and the bank lending would be only in their names. Paul and Emily’s lawyer at another firm, advised that the loan from Jenny and Bruce could affect whether Paul and Emily could get a home loan, as the bank would need to approve the agreement with Bruce and Jenny. However they included a condition that the loan would be repayable to Jenny and Bruce only on sale of the property. This reassured Paul and Emily’s bank, so they approved their home loan.
It’s always a good idea to talk to your lawyer (and the bank) to work out a solution specific to your needs.