The growing reliance on the “Bank of Mum and Dad” to help children enter the property market is becoming more common due to high property prices. The term refers to financial support provided by parents or grandparents to younger family members, usually to help with buying a first home in their early stages of a relationship. Parents’ main concerns revolve around whether the relationship will last and how to protect their financial contribution if the relationship ends.
Parents can assist their children in several ways when contributing to a property purchase, each with its own advantages and risks:
- Loans: A formal agreement where the money is expected to be repaid.
- Gifts: Non-repayable funds provided to help with a deposit.
Loans
If parents decide to provide a loan, it is crucial to formalise it with a Loan Agreement. This not only documents the intention of the parties at the time of loan advancement, it also ensures that if the relationship breaks down, there is clear evidence that it was intended that the money must be repaid. If no formal documentation exists, the court may view the funds as a gift, and the money could become part of the asset pool to be divided between the child and their partner during a property settlement. For example, in Maddock & Anor (No.2) [2011] FMCAfam 1340, a father loaned $240,000 for a property, but because there was no formal agreement and there had been no request for repayment until the couple separated, the court ruled that the sum was a gift, not a loan. To safeguard against this risk, it would be prudent that parents:
- Document the loan in writing and ensure it is signed by all parties.
- Specify the loan terms, including interest rates and repayment conditions.
- Consider securing the loan with a mortgage or a caveat on the property’s title for added protection.
If a loan is not documented, parents or grandparents may face significant financial stress if the child is unable to repay it, especially if the family member experiences job loss or other financial difficulties. In such cases, the parents may find themselves competing with creditors for repayment or struggling to recover their contribution.
Gifts
When parents choose to gift money, they give up any expectation of repayment and any claim on the property purchased with the funds. In the event of a breakdown of relationship, the court typically considers the gift as a financial contribution from the family of the person who received it. This can impact how assets are divided, often benefiting the recipient of the gift.
If parents intend to gift funds, it is important to:
- Clarify whether the gift is for their child alone or both their child and their partner.
- Provide a gift letter to accompany the finance application, confirming that the funds are a genuine gift.
However, if the relationship ends, disputes may arise over whether the gift was meant for both partners, potentially leading to extended legal negotiations or court involvement.
Finance brokers and lenders typically discourage loans from being used as part of a deposit, as banks need assurance that they will be repaid first in case of a default. Therefore, most of the time, parents and their children label the funds as a gift on the loan application to secure financing. However, disguising a loan as a gift can lead to significant issues later. If the arrangement is ever challenged in court, parents may lose the ability to reclaim the funds, as the court could rule that the contribution was a gift, leaving them unable to recover their financial investment.
Protecting Parental Contributions
In Australia, when a couple separates, whether married or de facto, they must go through a Property Settlement process, which requires full financial disclosure from both parties. If the couple cannot agree on how to divide the assets, the matter may end up in court, where decisions can be highly discretionary.
To protect financial contributions, parents and grandparents can consider the following steps:
- Document any loan with a formal Loan Agreement.
- Secure the loan with a mortgage or a caveat on the property title.
- Have the child and their partner enter a Binding Financial Agreement (BFA) to clarify how the loan or gift will be treated in case of separation.
- Incorporate the loan or gift arrangement in their Will and estate plan to avoid disputes after death.
Reliance on the “Bank of Mum and Dad” is likely to increase as property prices remain high. However, without proper documentation and legal advice, these well-intentioned contributions can lead to financial loss or family disputes. Seeking legal advice is crucial to ensure both parties are protected.
Contatto
If you wish to seek expert guidance regarding how to protect parental contributions, please call us on 1300 559 888 or fill out the enquiry form here.