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The “Bank of Mum and Dad” is Australia’s ninth biggest mortgage lender: but parents beware, there are risks to be considered!

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Attwood Marshall Lawyers Family Law & Estate Planning Senior Associate, Hayley Condon, discusses the risks families should be aware of when parents or grandparents lend money to children to purchase property or other significant investments. Don’t let disagreements about money destroy your family! 

Introduction

“The Bank of Mum and Dad” is a term that has been around for a long time as many first home buyers have been assisted by their parents, or grandparents, financially when entering the property market. In fact, it is estimated that 60% of first home buyers are receiving some form of financial assistance from their family and the “Bank of Mum and Dad” is Australia’s ninth biggest mortgage lender!  

Although this is not a new concept, we have seen a significant increase in people relying on their parents during the Covid pandemic to enter the property market as property prices continue to skyrocket. 

With mum and dad now sitting on more equity in their own homes resulting from the increase in property values, first home buyers are leveraging off this more than ever before.

There are some stark warnings for parents or grandparents who are considering providing financial assistance to their children or grandchildren by way of an inter-family loan. In many cases, there is an expectation that this cash advance needs to be repaid, but more often than not, there is no formal written agreement in place. This is where the well-intentioned arrangement can unravel, especially if the financial circumstances of the parties change. 

The need for legal advice before lending family money

It can seem unnecessary to put formal documentation in place or obtain independent legal advice when you want to help a child or grandchild, financially.  Everyone is excited at the prospect of their child or grandchild securing their first property, and parents or grandparents have the best of intentions in wanting to support their loved ones in achieving their homeownership goals.

There are several ways parents offer this support, which can be in the form of providing a lump sum payment to go towards the property, or alternatively, acting as guarantor for a home loan. In some cases, parents and children may also agree on a “rent to buy” arrangement where the child ultimately ends up owning the home.

All of these scenarios carry their own risks, and it is important for parents and grandparents, to understand that despite their hearts being in the right place, there is more to consider before providing that financial assistance. 

Unfortunately, even with the best of intentions, no one has a crystal ball as to what the future holds and when it comes to money, it is never as clear-cut as people hope.

The terms of the arrangement that once seemed clear when the financial assistance was provided, can become murky over time and open to interpretation depending on what side of the fence you are sitting on (lender or borrower).

Getting the right advice and documenting the arrangement in clear terms does not have to be a complex or overwhelming task. It is simply about ensuring that you are capturing the discussions being had at the time the money is being loaned and that there is a clear understanding as to what everyone is agreeing to.

Documenting the agreement early on can save you a lot of stress and legal costs if for some reason something changes, and the original agreement is not honoured. It can also aid in avoiding disputes that can destroy family relationships.

Let’s look at the issues that can arise

Financial stress: If parents, or grandparents, are reliant on the loan repayments for their own financial support, but the child or grandchild does not meet their obligation, the parents or grandparents may find themselves under financial stress and unable to meet their own financial commitments.

Alternatively, the child or grandchild may also have a change in their circumstances such as losing their job, which impacts their ability to repay the loan or other debts. The parents or grandparents may end up involved in a fight with creditors over the equity in the property where the loan is not documented or secured.  

Risk of losing your property: Another important risk to consider is if a parent or grandparent uses the equity in their home as security for their child or grandchild to purchase a property (for example. acting as guarantor for the home loan and giving a mortgage over their property to the lender as security for repayment of the loan) they are ultimately taking on the responsibility for that home loan if their child or grandchild does not pay their repayments. This means they are putting themselves at risk of losing their property if they too cannot meet the obligations of the child or grandchild, they have guaranteed if there is a default under the loan. This is a risk that is often glossed over when trying to assist a child or grandchild with the purchase of a home and requires proper legal advice before signing mortgage documents.

Who is responsible for the loan? If the loan was given to a child or grandchild in a relationship, where that child or grandchild and their spouse or partner go on to buy a property together, it is important to identify all parties who are expected to repay the loan. If that relationship breaks down before the loan is repaid, one party to the loan can often declare that it was a gift and they had no obligation to repay the loan. This scenario is more common than people may think, and, in many cases, it is the parents or grandparents that end up losing out and having to cut their losses.

In the above scenario, it is only when the child or grandchild and their former partner are represented by solicitors over their property settlement that the problem arises and a determination of whether or not the loan should form part of the asset pool is debated.

The flow on consequence of this scenario is that the parents or grandparents are dragged into their child or grandchild’s property settlement matter with their former partner which may end up before the Federal Circuit and Family Court of Australia.

The parents or grandparents incur their own legal costs in obtaining legal representation to argue that the money advanced was indeed a loan to be repaid by the child or grandchild and their former partner and then they must try to secure an order for repayment of that loan.

This is a problem which could have been avoided by consulting a solicitor who could advise on and properly document the loan arrangement at the time of the advance.

What happens if the Federal Circuit and Family Court of Australia determines that the loan was intended as a gift because there is no formal documentation in place to prove otherwise?

If this determination is made, then the money advanced (which in many cases is the equity in a property) forms part of the asset pool to be divided between the child or grandchild and their former partner as part of their property settlement matter.

The parents or grandparents will NOT be repaid and in essence, will lose their money.

From a property settlement perspective, the “gift” by the child’s parents or grandparents would be taken into account when dividing the asset pool between the child/grandchild and their former partner, but that is no consolation to the parents or grandparents who have lost their money unless their child/grandchild decides to repay them from the property settlement they receive.

One particular example we can reference where this exact situation unfolded is the case of Carpenter v Carpenter where a father loaned $200,000 to his son and his son’s wife at the time.

The money was used by the son and his wife to buy land on which they intended to build their first family home.

The agreement was not formally documented and in time the son and his wife separated.

After separation, the son asserted that the money was a loan and needed to be repaid to his father. His wife, however, asserted that the money was a gift.

As the father understood how his son and then-wife intended to use the funds he provided, the Court determined that the father had gifted the money to financially assist his son and his wife.

Consequently, the money did not need to be repaid to the father and the value of this gift remained in the asset pool for the benefit of the wife.

How families can avoid this situation if they want to help their children or grandchild financially

It is important that any inter-family loans are properly documented by a Loan Agreement. Depending on the situation it may also be advisable for the loan to be secured by mortgage.

It is a simple step to take, however, a valuable one especially given the real-life cases that have played out in Court, such as the example given above. In the case of Carpenter v Carpenter, if the father documented the advance with a Loan Agreement, he would have had a strong case argument against any claim raised by his son’s wife that the advance was a gift and there was no obligation to repay it.

Loans should be documented in your Will and estate plan

If you are lending money to a child or grandchild, you should give some thought to your estate planning and any implications that this may raise. Although it is not nice to think about, the question should be asked, what happens if the parents or grandparents die, and the loan remains outstanding?

It is important to understand what impact this might have on any other children or loved ones that the parents or grandparents may have wanted to provide for in their Will.

Disputes often arise after parents or grandparents have passed away when one child or grandchild has received a significant amount of money and their siblings have not received the same financial assistance.

Lending large amounts of money can have a significant effect when planning for the future and determining how your estate may be distributed if something unexpected does happen to you.

Inter-family loans should not only be documented in a Loan Agreement between the parties involved; but also documented in the lender’s Will, ensuring their wishes and intentions are clear.

It can be valuable to outline in your Will what will happen to the loan after death (for example does it have to be repaid or will it be forgiven?) You should also consider how such loans will be taken into account when dividing the estate among other beneficiaries.  

There can also be issues around Enduring Powers of Attorney if the child or grandchild who has received the advance of funds is also an attorney for the parent or grandparent. This can create significant issues later in having the loan repaid if the attorney does not acknowledge the loan and it is not common knowledge among family. If the loan is known about by family but not acknowledged by the child or grandchild attorney they could be put in a position of conflict of interest.

Taxation and Centrelink issues

There may be other financial considerations that a parent or grandparent should understand before advancing money to family members. Taxation issues must be considered, especially if a parent or grandparent sells an asset to advance the funds to their child or grandchild. There may also be Centrelink considerations to be mindful of due to the deeming provisions of loans – this may reduce or cancel your pension payments! This is why it is wise to obtain taxation and financial planning advice if you intend to lend money to a family member.

Attwood Marshall Lawyers – we want to help families maintain positive relationships

Money disagreements can destroy families. To avoid disputes arising, get the right advice and documents in place from the start. At Attwood Marshall Lawyers, we have expert teams that cover both family law and estate planning. With our lawyers’ experience and skillset, you can have peace of mind in knowing that your inter-family loan is documented properly, and everyone understands their rights and obligations under the agreement.

Although it may seem clinical to put a legal document in place when providing financial assistance to those you love and trust, no one has a crystal ball as to what the future holds, and these documents can reduce the risk of conflict or misunderstandings arising in the future.

Our experienced family lawyers are dedicated to supporting families through their most difficult challenges. We understand that emotions run high when relationships break down, particularly when money is involved. We want to help families resolve disputes quickly and effectively so that everyone can move on with their lives.

To discuss our family law services or if you need estate planning advice, contact our Department Manager Donna Tolley on direct line 07 5506 8241, email dtolley@attwoodmarshall.com.au or call our 24/7 phone line on 1800 621 071. You can visit any of our family lawyers at our conveniently located offices at Robina Town CentreCoolangattaKingscliffBrisbaneSydney and Melbourne.

Read more:

Appointing someone as a guardian for your child in your Will is not binding in the Family Law Court – but it is a good way to indicate your wishes

Divorce later in life: 3 common reasons why relationships can break down in your twilight years

For love and finances: why every couple should consider a Relationship Agreement

 

 

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