Brisbane’s Legal Lowdown: The bank of Mum and Dad – avoiding legal disputes when lending to family

Sofie: It’s 25 minutes to three on 4BC afternoons and time for this week’s Brisbane Legal Lowdown with Attwood Marshall Lawyers. And today we’re talking about something that’s become well, you’d say somewhat of a lifeline for many, particularly when it comes to buying a first home, but it’s also something that can land families in hot water if they’re not too careful.

We’re talking about the bank of Mum and Dad. This is when parents may step in to lend money to maybe help their kids get into the property market, maybe start a new business venture, maybe just get rid of the hex debt so that their borrowing power isn’t affected.

Joining us in the studio to unpack some of the risks and maybe some of the things that families need to consider when they walk down this path is Hayley Condon, the Wills and Estates and Family Law Special Counsel at Attwood Marshall Lawyers.

And she’s also here to answer your calls in this field. So, if you have a question this afternoon for Hayley, you can either give us a call on 133 882 or you could send through a text to 0499 880 882.

Welcome to the show. Hayley.

Hayley: Thank you, Sofie.

Sofie: Now, when we talk about this bank of Mum and Dad from a legal perspective, why are we hearing more about it these days? And what does it really mean? Is it just mum and dad being the bank?

Hayley: Pretty much, Sofie. The Bank of Mum and Dad is becoming a significant financial institution with considerable amounts of money being advanced from parents to children or among other family members, to assist them to get into the property market given property prices and the cost of living.

Sofie: And is that really the primary reason that you are seeing as to why that money might change hands? Is it mostly driven by property purchases?

Hayley: It is generally driven by property purchasers. The way the economy is, it’s very difficult for the youth of today to be able to save a deposit plus meet the cost of living, and that’s generally why parents decide to open the purse strings and help them buy their first and potentially even 2nd, 3rd or 4th properties.

Sofie: Interesting that you put it in those terms because we talk so much about the housing market at the moment. And the supply demand issue that we have. Because there is nothing to stop a parent giving some money to a child who is buying their first home, they would still be eligible for all of the first home buyers incentives.

Hayley: That is correct. The only thing that might pop up is if a parent or parents are not advancing the full amount of the property purchase price, and a third-party financier is involved, then generally the financiers don’t want to play second fiddle. They will take first security and as to whether a parent can then take security for any formal loan agreement they put in place, would need to be considered having regard to the terms of that mortgage.

Sofie: Most parents want to be able to help their kids. You know, we don’t really think twice about some of the risks. What can go wrong if there’s no paperwork or clear agreement in place?

Hayley: A lot, Sofie. That is the short answer. Look, I often see large amounts of money being advanced between family members on a general understanding that it’s a loan that would be repaid without terms being properly discussed, or if those terms are discussed and agreed upon, then the arrangement is not formalised by a loan agreement.

Generally, what I hear is there’s no need. We’re family, we trust each other. But you can immediately see the problem if a family breakdown occurs.

Firstly, you’re going to have a dispute as to whether the advance is a loan or a gift. And if it is acknowledged that the advance is alone, then around the loan terms, because you can bet your bottom dollar that when it comes time for the parties to this arrangement, being the lender and the borrower, to recall what was discussed, what they remember is quite different around those terms.

Sofie: Perception and reality. And I guess there’s also the added complication in some families of siblings because I know that there are cases where mum and dad might lend to one of the kids, wanting to keep it quiet because you know that one needs help, maybe the other one doesn’t, and that can create issues within the family dynamic once it all kind of is uncovered later.

Hayley: It certainly can create issues when those pieces of information pop out. I’ll give you a prime example, Sofie. So just think about the scenario where parents advance money to a child, or to a child and their spouse to purchase a property. That advance is not documented because remember, we’re family.

Sofie: We trust each other.

Hayley: But then that relationship breaks down. Straight away, you’ve got a dispute. Not only over whether the advance is a gift or a loan, you tend to see disputes between families themselves, in particular between other siblings having arguments with parents. Why didn’t you formalise this? Look at the situation you’re now in. Because what we tend to see is the former spouse is obviously going to assert that the advance is a gift, because hey, that’s a great outcome for them. The child asserts that the advance is a loan, that should be repaid to their parents and should be resolved as part of property division. And then you have the poor parents that get dragged in to a messy family law dispute between their child and their spouse, where they have to pursue repayment of the loan. And guess what? That doesn’t always happen because if they can’t satisfy, for example, a court that the advance is a clear loan. That could be the end of it.

Sofie: You know, I go back to what I said earlier, let’s say, for arguments sake, mum and dad want to give $100,000. That’s going to be towards the deposit of whatever the kid’s been able to save. To buy this property and maybe they don’t want to document it, partly because as I said earlier, if that’s if you can say that that was a gift or it was saved or whatever, it doesn’t impact first home buyers’ incentives, it may be a way for you to be able to jump through hoops much faster.

What are the implications of coming to see somebody like you to say mum and dad are going to give us $100,000, can we just have a really simple document with the terms of the arrangement, be it a gift or be it a loan that would be repaid if the property was ever sold or, you know, whatever the case may be, do people not do it because they have the idea that it’s going to be a really expensive, protracted process? Or are they just falling back on as you’ve said a couple of times, but we’re family and we trust each other. And it’s going to be fine.

Hayley: Sofie, I think it’s a bit of both. So if we explore the cost side of things, yes, sometimes people simply don’t want to invest the money to obtain legal advice and have a document prepared. It doesn’t have to be a document like what the ANZ Bank or the NBA offer you, it can be something relatively simple that simply encapsulates the terms.

And when you’re thinking about how much money is actually being advanced, it’s a small price to have that protection.

There is also the other side of the coin being the family dynamic. I’ve seen situations where parents are reluctant to ask their child or if it’s alone to a child and their spouse to sign a loan agreement because it might create some family disharmony. Don’t you trust me? Is something that I hear.

Sofie: Yeah, and the problem is that’s all fine until something goes wrong. And while we always go through these things with hoping that it will never go wrong, there are no guarantees and that’s when they come to you after the fact.

Hayley: There are no guarantees in life, Sofie. That’s exactly what I see.

Sofie: And I’m sure that you have people who say oh we wish we had.

For the parents who are listening themselves, who genuinely want to help, but would also in the terms that you’ve just said, want to be able to protect themselves, what are some of the simplest steps or the first step that they should take to avoid there being any potential future drama.

Hayley: Well, the first step that they should take is have a discussion with the child or whoever the borrower is going to be, about the terms of the loan.

What are the expectations here? So, everybody is clear. Once that’s determined, get some advice and engage a professional to put a basic loan agreement in place which encapsulates those terms. Where people can fall afoul is where they feel they need to put together some elaborate loan agreement, similar to what a bank will offer, which actually includes terms that they haven’t agreed to.

So you can imagine what happens. It gets signed, it gets put in the cupboard, nobody complies with it and straight away it puts in jeopardy the legitimacy of the loan and the ability to enforce it later on.

Sofie: Yeah, I just received a text from Matt who says exactly what you’re talking about. He says we had $100,000 loan undocumented from the Bank of Mum and Dad. Now my marriage has dissolved. It’s an absolute mess. The other party is claiming half of that gifted $100,000. And the mess that comes with the equity split.

So he is living exactly what you said. I think the final question that I’d like to ask you and Tim has alluded to. This is when parents and I don’t know if this is something you can answer, but when parents will step in to be guarantors on a loan for a property that can also become very messy. And often parents will be asked to do that if even if they haven’t have had to gift for part of the deposit for the purchase, but maybe we can get the loan from the bank if mum and dad also sign and say that they’ll do a guarantor for us. Do you have many people who come to you for those arrangements?

Hayley: Yes, we do have clients that come to us for advice around guarantees.

Generally, a parent can’t sign off on a guarantee these days without legal advice. It is absolutely critical that they obtain legal advice, so they truly understand what the guarantee means and what level of exposure they have, as well as their own personal assets if their child or their child and their spouse defaults on the loan.

Sofie: Thank you so much for filling us in today, giving us some of that information. And of course, if you’d like to reach out to Hayley directly, you can find her as the wills and estates and family law special counsel at Attwood Marshall Lawyers, and we will talk Legal Lowdown again next Wednesday on afternoons. Thanks, Hayley.

Hayley: Thank you, Sofie. It’s a pleasure.