Family loans: Bank of Mum and Dad’s legal minefield
Booming house prices make getting into the market tougher than ever for young adults. Here’s what their parents should know.
The Bank of Mum and Dad is Australia’s ninth-largest lender but often stumbles through big transactions without the lawyers that financial institutions use.
Parents who loan or give money to their children – often to help them into the housing market – can find themselves in horror financial and emotional situations, and risks are rising as home values surge.
Marriage breakdowns, bankruptcies and family fights are among the problems that can severely impact a parent’s retirement and potentially cost them their own home.
Australian Family Lawyers head of asset protect Barry Frakes says Baby Boomers hold the majority of the nation’s wealth and many will share it with their children. He says parents often don’t understand the potential pitfalls of family lending, and more are asking for advice.
“We have had a number of calls from parents in recent months who went to auctions with their children and promised to stump up some of the final payment as bids went past pre-approved bank loans,” Frakes says.
“So a lot of this is happening on the fly without legal advice, which is very concerning to us.”
Frakes says meeting many parents who lost money and were dragged into court cases prompted his firm to develop a streamlined specialist service to help them.
“It may be an uncomfortable conversation about engaging lawyers to offer advice and draft loan agreements, but it can save lots of heartache and litigation costs in the future,” he says.
EVEN THINGS UP
Crystal Wealth Partners director Louise Lakomy says her firm is often asked by clients about gifting or lending money to children.
She says parents should factor in their child’s siblings and potential exposure to risks such as relationships, business ownership, bankruptcy, gambling and drug addiction.
“One option is to put in place a loan agreement with the child who is taking the loan out,” Lakomy says.
“A second option is to consider lending from a trust if parents have one in place or alternatively update their will to reflect gifting to one child to ensure equity.”
Tony Feagan, 58, wants to help his sons buy property and likes the idea of having a proper legal document “rather than just a handshake deal”.
He says there are many horror stories about lending money to family and he sees legal advice and documentation as security and a form of insurance.
“I would say to other parents consider the ways you can safeguard your investment and also your family relationships in the future, and I think it’s important that you are really clear from the start that it is a leg up not a handout,” Feagan says.
His son Pat, 22, says young people will need options beyond traditional bank loans in a market that seems “completely out of reach at the moment”, and he understands legal advice protects both parents and children.
“I’d be happy to sign it and show my parents that I am taking this seriously,” he says.
GUARANTOR WARNING
Parents who don’t loan money but instead go guarantor for a child’s home loan should also seek legal advice.
Commercial law firm Cowell Clarke director Natalie Abela says they should be mindful of helping one child when there are siblings.
“This inequality may give rise to a claim against the parent’s estate upon death,” she says.
“If it is not intended to be a gift, it is wise to ensure that the terms of the arrangement are properly documented, such as by way of a loan agreement.”
And if transferring real estate to a child, parents can consider holding it as joint tenants with the child “so that the child is unable to sell their share in the property and only becomes the sole owner of the property upon the death of the parent”, Abela says.
POTENTIAL PROBLEMS
• Disagreements about whether money is a loan or gift.
• Without a proper loan agreement, a child’s bankruptcy may leave parents lining up with other creditors without priority.
• Relationship breakdown may see a former spouse claiming part of the parents’ money.
• Agreements may be rejected by courts if all sides have not had independent legal advice.
Source: Australian Family Lawyers
More Coverage
Why more investors put their money before the environment
Sustainable investing has been a growth area in recent years but a new study suggests some people are putting it on the backburner.
Why investors will bolt if property taxes change
Tinkering with property taxes drives investors out of the market – it’s just happened in New Zealand and now Canberra is looking at a very similar picture.