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Securing family loans.

Rob was a middle aged widower in a comfortable financial position with a good job, a mortgage free home and substantial cash savings. Kate was his only daughter.

Kate had met Michael while at school and they had married at a young age. They worked hard to save for their big "OE" and spent 2 years in London before returning to settle back in NZ. They returned to good jobs and began to work hard and save hard to buy themselves a home in Auckland.

Kate and Michael found that property prices increased faster than they were able to save and that they were making little headway towards saving enough deposit for a home. Rob finally decided that the young couple would be unable to get into the Auckland property market without financial assistance so decided to help out. He told them that he would lend them $100,000 to help them buy a home.

Kate and Michael were unsuccessful bidders at several auctions until they finally won an auction for property in an outer suburb. They borrowed a substantial residential loan from the bank. Because Michael had now been with Kate for 11 years and was very much a part of the family, Rob decided that he did not need to formalise the loan.

Two years later Michael had become tired of working for someone else and suggested to Kate that he set up his own business. Kate was confident that he would succeed and agreed. They were able to borrow another $150,000 against their home which had increased in value.

Michael’s business failed. The $150,000 was soon lost, debts rapidly built up and unpaid creditors began screaming for payment. Mortgage payments fell into arrears. The stress destroyed the marriage and a year later Michael and Kate separated and Michael walked away from the business. The split was acrimonious.

Neither was in a position to buy the other out of the home so it was sold. The bank took most of the sale proceeds and only $90,000 was left. Rob offered to accept that $90,000 as full repayment of the $100,000 loan but Michael insisted that the $100,000 had been a gift to him and Kate and he required 50% of the remaining $90,000 as his share of the relationship property.

Rob had not considered formally recording the loan to be worth the legal cost involved. How wrong he was!


For further Trust Law advice, get in touch with Tammy and the Trust Law team.
tammy@davenportslaw.co.nz | 09 883 4420


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