If you were asked to name the 5th largest lender in Australia, no one would be surprised if you named one of many home loan providers we see advertising on TV and social media.
However, research suggests that the answer is actually the Bank of Mum and Dad.
Indications are that almost 1/3 of parents are helping their children to get a start in the property market, making them a player in Australia’s lending market. Unfortunately these arrangements do not always end well.
So whether providing money to their child, or a guarantee to cover the child’s loan with the bank, every parent should consider what will happen if:
- they need the money in the future?
- they no longer qualify for Centrelink benefits because of the support provided?
- they don’t do the same for their other children?
- they do the same for their other children, but the amount lent varies?
- the relationship between the child or other family members become strained?
- they pass away before the money is repaid?
- the child refuses to honour the loan agreement?
- the child defaults on their other loan/mortgage to another bank?
- the child goes through a relationship breakdown?
These circumstances could result in parents suffering their own financial strain, especially if they find themselves working for longer than expected or informal loan agreements are not honoured.
While many parents may provide funds to their children by way of a gift with no intention of repayment, there are many reasons why it may actually be sensible to approach these arrangements as a loan rather than a gift because of the higher levels of protection a loan agreement affords Mum and Dad, the child and other family members should the child’s circumstances take a unexpected turn for the worse.
There are a number of approaches to documenting these loans from a handshake to formal documentation but if the child’s circumstances take an unexpected turn all of the parties will benefit from a written agreement that set out clearly the terms of the loans including the amount loaned, whether interest will be charged, how payment will be made and whether any formal security such as a mortgage is provided and registered over the property.
These documents will also play a key role in preventing estate disputes should Mum and Dad pass away without any repayment being made and the siblings of the borrowers becoming aware of the generosity of their parents to other siblings which means that they may receive a lesser share of their parents estate.
While we would all like to think that this would not happen it is a sad reality that each year in Australia a number of family relationships are irreparably damaged when an apparent or perceived inequality arises between the treatment of siblings in the division of their parents estates.
So if you are thinking about becoming one of the rapidly growing players in the world of Mum and Dad banks, or you’re a trusted advisor to clients who have provided financial accommodation to their children, we strongly recommend you talk to our Tax, Structures + Planning team to discuss how to protect yourself, your child, your other family members or your clients.