Buying a Home From Family Below Market Value

How a favourable purchase works

A favourable purchase — sometimes called gifted equity — is where a family member sells you a property for less than its market value, and the discount is treated as your contribution to the deal.

The mechanism rests on a distinction that catches people out. Lenders normally lend against the lower of purchase price or valuation. But in a genuine favourable purchase between related parties, many lenders will assess the loan-to-value ratio against the registered valuation rather than the discounted price — which means the discount functions as equity you did not have to save.

A worked illustration, using round numbers:

• Your parents' home is valued at $700,000 by a registered valuer.
• They agree to sell it to you for $560,000.
• The $140,000 difference is 20% of the valuation.
• Where a lender accepts this, you may be able to borrow the full $560,000 purchase price while still sitting at 80% of the property's value.

What lenders will require

1. A registered valuation. Not a rates valuation, not an appraisal from an agent — a valuation from a registered valuer, usually instructed by the lender.
2. A gifting certificate or deed of gift. A signed document from the vendor confirming the discount is a genuine gift, with no expectation of repayment and no security taken over the property.
3. Independent legal advice for both sides. You and your family members need separate lawyers. This is not a formality — lenders require it and it protects everyone.
4. A proper sale and purchase agreement. The transaction must be documented as a real sale at the agreed price, not an informal arrangement.
5. Confirmation the vendor is not retaining an interest. If your parents want to keep a stake, or want the money back later, that is a different transaction entirely and changes the lending.

The word 'genuine' is doing a lot of work here. A gift that is really a loan — with an expectation of repayment — is a liability, and lenders will treat it as one if they discover it.

The questions families need to answer first

The lending is usually the easy part. The difficult conversations are about fairness and consequences, and they are much better had before anything is signed:

• Other siblings. Is the discount an advance on inheritance, and will it be accounted for in the estate? Write down what has been agreed.
• The vendor's own position. Do your parents need the full value to fund retirement or care? Selling below value reduces the capital available to them, permanently.
• Residential care subsidy. Gifting can affect eligibility for residential care subsidies, where asset testing applies and historic gifting is examined. Specialist advice is essential here.
• Relationship property. A gift to you may become relationship property depending on how it is handled. If you have a partner, consider a contracting out agreement.
• What if things go wrong. If you later cannot pay the mortgage, the house your family gifted equity in is the security. Everyone should understand that.

These are lawyer and accountant questions, and they are worth paying for properly.

Tax and the bright-line test

New Zealand has no general gift duty, so the gift itself is not usually taxed. But there are other tax considerations:

• Bright-line test. If the property is not the vendor's main home — a rental, a holiday home, or a property held in a trust or company — selling it may trigger bright-line obligations even in a family transfer at a discount. See our bright-line test guide.
• Deemed market value. For tax purposes, transactions between associated persons can be treated as occurring at market value regardless of the price actually paid.
• Trusts and companies. If the property is held in a structure, the rules are more complex and trustee duties apply.

Get accounting advice before agreeing a price. A transfer that looks straightforward can have a tax consequence that outweighs the benefit of the discount.

Alternatives worth considering

Our family guarantee case study and gifted deposit case study show two of these in practice.

How we approach family transactions

We start with lender policy, because it determines what structure is worth pursuing. Then we make sure the documentation is right — valuation, gifting certificate, separate legal advice — so the file does not stall at the last minute over a missing signature.

Most importantly, we are straight with everyone involved about what the arrangement means. These deals go wrong when expectations were never written down. Send us the valuation and what your family has in mind, and we will tell you what is achievable and what to formalise.

Getting the valuation right

The registered valuation is the foundation of a favourable purchase, because the gifted equity is measured against it. A few points that matter:

• It must be a registered valuation. A rating valuation is a mass-appraisal figure for rates purposes and is not acceptable. An agent's appraisal is a marketing estimate, not a valuation.
• The lender usually instructs it. Most lenders require the valuation to be commissioned through their own panel, so a valuation you obtained independently may need to be redone.
• It reflects market value, not family value. The valuer assesses what the property would sell for on the open market, which is the whole point.
• Valuations have a shelf life. If the transaction takes months to organise, the lender may require a fresh one.

Do not agree a price with your family before you have a sense of the valuation and the lender's policy. A price agreed on assumption can need renegotiating, which is an awkward conversation inside a family.

The paperwork, in order

1. Establish lender policy on favourable purchases and how much of the deposit may come from gifted equity.
2. Each party engages their own lawyer. Separate representation is required and it protects everyone.
3. Obtain the registered valuation through the lender's process.
4. Agree the price in light of the valuation and the lender's requirements.
5. Sign a proper sale and purchase agreement at the agreed price.
6. Vendor signs a gifting certificate or deed of gift confirming the discount is a genuine gift, with no repayment expected and no security retained.
7. Vendor obtains independent advice on the consequences for them — tax, estate, and any future residential care assessment.
8. Submit the full package to the lender together, so the file is not held up by a missing document.

The most common cause of delay on these files is a gifting certificate that is missing, unsigned, or worded in a way that implies repayment. Get the wording from your lawyer rather than using a template.

Writing down what the family has agreed

The hardest part of these transactions is not legal or financial — it is the unspoken expectations. Years later, a sibling remembers it as an advance on inheritance and you remember it as a gift. Nobody wrote anything down.

What we encourage families to document, separately from the lending paperwork:

• Whether the discount is intended as an advance on inheritance, to be accounted for in the estate, or as a gift that is not.
• What happens if the vendor later needs the capital — and the clear acknowledgement that it is gone.
• Whether other children are to receive equivalent help, and when.
• What happens if you separate from a partner, and whether a contracting out agreement is needed.
• What happens if you later want to sell.

A short written record signed by everyone, prepared alongside the legal documents, costs very little and prevents the kind of dispute that outlives the mortgage. Your lawyer can incorporate this into the estate planning conversation at the same time.

This article explains how New Zealand lenders generally assess these situations. It is general information, not personalised financial advice, and lender policy changes often — check your own position with a registered adviser. Official sources: Reserve Bank of New Zealand for lending policy and the OCR, and Sorted.org.nz for independent government-backed money guidance.