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The Mum And Dad Bank

In part three of his three-part series on helping children into property, Mark Withers deciphers the nitty-gritty lending details, when the parent acts as ‘the bank

By: Mark Withers

1 May 2016

When determining how much money to lend your child for a property purchase, a good starting point is to take your child to a banker or broker and run through a loan application scenario, based on what their income level is and the size of their own deposit

A revelation at this point is that banks will often wish to see evidence the child has actually saved their own deposit. Having a deposit from mum and dad is all fine and well but if the child has shown no ability to save the sums needed to service the mortgage into the future the bank will be justifiably hesitant.

You will do your child a great service if you can challenge them to save funds at the same level as they will need to service their first mortgage. Incentivise them by explaining how the loan (you will make once they have achieved a given deposit level) will work and how they can benefit from it.

Disclosure Mentality

The terms of your lending will also be a material factor for the bank. If, for example, your loan bears interest and has regular repayments this will directly impact the bank’s own assessment of the cash flow your offspring retains to service the bank lending. So, in this sense, you really must have a full disclosure mentality with the bank and negotiate a mutually acceptable set of criteria for your lending.

Even the question of the interest rate has ramifications. Will you charge any? If so, will the interest be paid regularly or when the loan is repaid? Will the interest vary and what will you link the rate to? If you do charge interest, there is resident withholding tax (RWT) to administer. Yes, if the interest bill exceeds $5000 per year your child is obligated to withhold tax at your nominated tax rate from the interest payments. You are paid the net sum and the IRD is paid the tax.

A certificate is generated at year-end showing what has been withheld from you. If you are borrowing the money that you are lending your child, you may be able to gain an exemption from this RWT requirement because you are generating no net taxable income from the arrangement. The obligation remains for your child to register as a payer of RWT though, unless you arrange the exemption certificate.

Trustee Involvement

Finally, consider who or what will actually be making the loan to the child – you or your family trust? This is typically just the sort of arrangement your trust is there for, but if it’s the trust, make sure you involve your independent trustee in the planning and decision making early on and draft resolutions confirming all the decisions and agreements entered into. Your trustee will be very aware of the need to be fair to all beneficiaries and should be a useful ally when making arrangements.

An independent trustee can also be useful to help set expectations with the child. They can act as your bad cop – conversations might go a bit like this: “No darling, the trust can’t lend you $1million for a first home in Ponsonby; the independent trustee has only authorised a $200k advance for a two-bedroom flat in Papatoetoe.”

Distributions can also be made from a trust that might take the form of reductions in the loan the child owes. This can be a great way of keeping things fair. For example, say you have three children. Two are independent, one needs help. A loan is made to the one who needs help. One of the independent children then marries. The trustees decide to mark this with a $20,000 distribution to all children. The two independent children receive this in cash. The child with the loan has the balance of their debt reduced.

In this way the independent children will see that despite not being lent money, the trustees are treating all fairly with respect to distribution.

Mark Withers is a partner of accountancy firm Withers Tsang & Co.


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