Climbing the property ladder– what’s love got to do with it?
Climbing the property ladder– what’s love got to do with it?
The Kiwi property purchasing dream has been under assault in recent times. A combination of Government and Reserve Bank policies tightening money supply on the one hand, and significant growth in property prices on the other, is leaving many to wonder whether Kiwi property ownership has become, what could be viewed as, an unaffordable dream.
Trading banks, for some time resistant to loaning funds without young Kiwi individuals or couples having saved the required deposit (usually 20% of the acquisition price), are now becoming more open to the combination of intergenerational effort to achieve the Kiwi dream.
A case study: -
1. Bob and Phillipa have three children: Sally, Jenny and Steven.
2. Steven wishes to acquire a property with his partner, Melanie, however the current housing market demands and Reserve Bank requirements are keeping this just out of reach.
3. Bob and Phillipa wish to assist the young couple with their purchase. Unfortunately, Bob and Phillipa also assisting Sally and/or Jenny in the same way, would be a stretch.
4. A verbal agreement is reached between Steven (and Melanie), Bob and Phillipa, that Bob and Phillipa will either loan substantial funds to assist in acquiring a property or they will acquire part of the property. Either way, their assistance can be utilised by Steven and Melanie for as long as needed.
5. All of the above is on the basis that Sally and Jenny will “be fine with it” but without any real plan as to how to unwind the arrangement being entered into. At this point it is clear that love is leading the way and everyone proceeds on the basis of “whatever happens, we can sort it out”.
As a result, a loving solution to an otherwise difficult conundrum is achieved, and happiness descends upon Bob and Phillipa’s household, and of course the new household acquired by Steven and Melanie.
What are the unsafe assumptions the family have made at the outset?
1. Because Bob and Phillipa have assisted Steven and Melanie, Sally and Jenny may assume similar assistance can be provided to them.
2. The arrangement, whilst “on the never-never”, will actually result in Steven and Melanie “doing the right thing” in due course.
3. The parties will always be able to sort out matters in a harmonious way, whatever unfolds in the future.
4. That Steven and Melanie’s financial position will improve over time.
5. The loan funds recorded in writing and/or an interest held by Bob and Phillipa in the property “saves all” and avoids any disputes arising, even in circumstances where there is no end date to the arrangement that has been agreed.
6. That Bob and Phillipa (or the survivor of them) will simply live on for as long as is needed to sort out unwinding the arrangement with Steven and Melanie on the one hand, and placating Sally and Jenny on the other.
7. Sally and/or Jenny are not, in simple terms, “fine with it” and there are hidden grievances between siblings that all of a sudden come to the surface (these grievances could have been long held but unspoken for many years).
8. Tying up a significant part of Bob and Phillipa’s wealth in Steven and Melanie’s dreams will not affect what Steven, Sally and Jenny see as “their share” of their parents’ estates.
What has love achieved?
Love, whist a driver of the desire to help Steven and Melanie at the outset (combined with Bob and Phillipa’s hope that Sally and Jenny will continue to be happy about matters regardless) will not sustain the parties in the face of any of the unsafe assumptions referred to above being tested to the contrary. The desire to assist can morph into significant problems in the years that follow and a pathway needs to be laid from the outset to avoid that.
The solution
A loving intention combined with transparency. The simplest way to create the necessary transparency is two-fold:
1. A written agreement which sets out the parties’ expectations at the outset and in the long-term and which provides for an end date to the “leg-up” arrangement entered into. As a result, Steven and Melanie would be under no illusions that the leg-up will come to an end. Such written agreements need to be tailored to the family’s overall financial circumstances and, if required, provide for the sale of the property acquired to return funds to their source on or before an agreed date. In many cases, tying the need for repayment to the death of the surviving parent (or within specified period soon thereafter) is needed.
2. Open an honest discussion with all family members who may be affected by the arrangements being made (even if they are not the beneficiary of those arrangements) should be had at the outset at the very least to ensure that all parties start on the same page. This will reduce the likelihood of a disgruntled child raising concerns at a later date where he or she has bought into what was a loving intention at the outset.
We can help
For assistance in turning a loving intention, into a workable long-term solution, please contact us. We can assist you in ensuring that love most certainly has everything to do with Kiwis climbing the property ladder.
