Finance considerations when purchasing a residential property

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So, you have entered into an agreement to purchase a house – congratulations!  You may have included a finance condition in the agreement or you may have already had finance pre-approved by your bank.

There are many things to think about when you are arranging your finance including: 

Who is the purchaser going to be?  It could be a:
a) Family Trust;
b) Company; or
c) You personally 

Who the purchasing entity will be will need to be taken into consideration by the bank when approving your finance. 

Family Trust

Typically, if you have a family trust, and the family trust is going to own the property, the bank may be lending you the money personally, but as the trust holds the asset, the bank will require the trust to guarantee the loan and that guarantee will be supported by a mortgage over the property the trust is purchasing. 

Company

If the property is going to be purchased by a company (including a Look Through Company (formerly an LAQC) there are generally two ways to structure the loan and security: 

The bank loans the company the money to complete the purchase, in which case the bank may require the directors of that company to personally guarantee the loan. 

The bank is loaning you the money personally, but as the company holds the asset the bank will require the company to guarantee the loan and that guarantee would be supported by a mortgage over the property the company is purchasing. 

Also, if a company is going to be either the purchaser or provide the security, the bank could require what is called a General Security Agreement (“GSA”) over all or some of the assets of that company.   A GSA is a security over personal property (not land) including motor vehicles, boats, plant and equipment, all present and after acquired personal property. 

Personal names:
If the property is going to be purchased in your personal names, then typically the bank would lend the money to you personally and the bank’s security would be a mortgage over the property.

The above is a brief summary only and not exhaustive.  There can be more structures that could be considered.

In summary things to consider when purchasing a residential property: 

Who is the purchaser?
a) Family Trust;
b) Company; or
c) You personally 

Depending on the purchaser entity the bank may require:

a) Loan agreement;
b) Loan agreement and guarantee;
c) Loan agreement and guarantee and General Security Agreement.

 As each structure has different advantages and disadvantages from a legal, tax and asset protection perspective (not exhaustive) an experienced property lawyer can help you understand the implications of each structure before you decide who the purchasing entity will be.

 If you have any questions regarding the above, or wish to seek advice regarding buying residential property, please contact property lawyer Wade Hansen by phone on 837 6885 or email wade.hansen@smithpartners.co.nz