No queues, no paperwork, no PINs to remember, very few customers to deal with — it’s the family-owned bank of your dreams and it has a name: the Bank of Mum and Dad.
It was reported last year that 60 per cent of first-home buyers needed to borrow funds from their parents to get into the property market.
And while doing so is hassle free for many, the seemingly easy-going arrangement can be where the danger lies.
Brisbane lawyer Brian Herd specializes in elder law and often sees clients who have seen the bad side.
“Because the deposits are so high these days and prices are so high, [some clients] can’t afford these deposits by themselves. Nor will the bank lend them the additional deposit,” Mr Herd says.
“So the obvious candidate to do so are their parents.”
Mr Herd spoke to ABC Radio Sydney about the main things parents need to be aware of when lending their children money to access the property market.
Is it a loan or a gift?
When a parent gives money to a child the law presumes it is a gift unless documented as such, Mr Herd says.
“The child has got this advantage of a legal presumption that the money from the parent to the child is a gift, which means it doesn’t have to be repaid. Unless the parent could provide otherwise,” he says.
“Without a document, the parents can’t provide otherwise.”
The key to avoiding any misunderstanding is to have the arrangement set in writing, and explicitly state whether the money needs to be repaid or not.
LawAccess NSW, for example, says any written private loan agreements should include:
- The full names of the parties
- Their addresses
- The principal amount of the loan
- The term of the loan
- The amount and frequency of repayments
- Any rates of interest being applied.
LawAccess NSW advises that you should obtain legal advice before lending money to someone.
Repayments have legal time limits
If it is a loan, parents should explicitly ask for repayments.
Each State and Territory place time limits on the rights of someone to recover a debt.
In New South Wales, for example, the law stipulates that the lender can demand repayment within the first six years of having given the money. Once those years lapse, you are no longer legally entitled to recover that loan.
In the Northern Territory this time limit is three years.
Importantly, in most jurisdictions the time limit begins once the money is given, not from when you finally get around to demanding payment.
“There are legal tricks of the trade that people need to be aware of in these familial relationships which can come back to haunt parents in particular,” Mr Herd says.
Be careful lending to a child’s business
If a child or family member needs money to set up a small business for example, or so they can rent an office space or purchase equipment, they may ask for loans to be paid to the company.
It might feel the same as lending money to the person, but things become tricky if the business runs into trouble.
The business will owe you the money, but the person will not.
“If that business goes belly up and the parents tried to recover it [the money] from their child, the child says: ‘I don’t owe you the money, my liquidated business does, and it can’t afford to pay’,” Mr Herd says.
The key is documentation
Most of these issues can be avoided so long as the money is recorded at the time in writing as a gift or a loan.
Many people calling and texting ABC Radio Sydney told the program they had great experiences seeing their children get into the housing market without creating any familial issues.
Garth from Port Macquarie says they were unable to buy a home without their parents’ money, so they were more than happy to give their children money in a “gentleman’s agreement.”
For others, it represented a financial boon. Darren from Orange acted as guarantor via the bank for his daughter from him. When she built her home de ella prior to the recent housing boom, she made the money back because the equity rose so quickly.
“A great news story for her as a young person, that she was on the money at the time. And we’re proud that we could help her out,” Darren says.
For people like Paul, it can tear families apart. Paul lent his family member some money for property, but they kept putting off signing the agreement at the time.
“I spent ages in court to get back two thirds of what I loaned,” Paul wrote to the ABC.
Mr Herd says he’s not suggesting children or family members will always exploit the legal loopholes, but issues can arise if motivations are not properly documented.
“Lawyers see the worst side of humanity, we don’t see the best side,” Mr Herd says.
“This is what happens, children can be malevolent when it comes to defending their financial position. Even in the face of a parent’s generosity.”
Where you can find more information:
- There is a Legal Aid commission in every state and territory that provides services to disadvantaged clients.
- Community Legal Centers Australia also has a directory to help find independent, non-profit legal centers in every state and territory.
- The National Debt Helpline is a not-for-profit service helping people with debt problems.
This article contains general information only. You should consider obtaining independent professional legal advice in relation to your particular circumstances.
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Screenshot: Joel Cunningham
