Lending money to family to buy a house is increasingly common in the challenging Australian property market. The ‘Bank of Mum and Dad’ is vital for many young Australians, with about 60% of first-time homeowners relying on parental financial assistance. While this generosity is admirable, it’s crucial for parents and children to think strategically to protect themselves and preserve their important familial bonds.
What to Consider Before Lending or Borrowing
Before any money changes hands, it’s wise to reflect on everyone’s current and future circumstances. Many parents extend financial help expecting to be repaid but lack the proper legal documentation to enforce this. Without a well-structured loan agreement, the money is considered a gift, and you might not be able to reclaim it even in the event of major life changes.
There are various ways to offer financial assistance – loans, gifts, or going guarantor. Each carries distinct risks and benefits:
Strategies for Safe and Supportive Lending
Here’s how parents and children can minimize potential disputes and financial losses:
- Strategy One: Loan Agreement – The Essential Safeguard If you’re extending a loan, treat it as a professional transaction, complete with a precise loan agreement. This should include repayment terms, interest, and ideally be secured by a first or second mortgage on the property. Documenting these details protects you against life events like relationship breakdowns, insolvency, or death, which we’ll discuss further.
- Strategy Two: Personal Guarantee – Extra Security When the property is held in a company name, ensure you have a personal guarantee from your adult child.
- Strategy Three: Gift – Clarity from the Start Gifting funds is simple, but remember: once gifted, you can’t transform it into a loan if circumstances change.
Preparing for Life’s Uncertainties
- Relationship Breakdown: Undocumented loans or gifts can get caught in the crossfire of a separation, even if the relationship wasn’t formed when the money was gifted. A lack of documentation might lead to the money being legally considered a gift. To mitigate this, consider having your child and their partner enter into a binding financial agreement (“prenup”) that acknowledges the existence of the loan.
- Insolvency and Bankruptcy: A properly documented and secured loan offers some protection in the case of financial hardship. Your secured interest will have priority over any liquidator or trustee if the need arises.
- Death: In the unfortunate event of death, gifted funds become part of the deceased’s estate – you won’t automatically receive them back. A loan agreement with a secured interest ensures your money is repaid, even in these difficult circumstances.
Guarantors: Understand the Risks Becoming a guarantor for your child’s loan carries significant risk. The lender has the right to seek repayment from you if your child defaults. Make sure you fully grasp this responsibility before offering a guarantee. While it’s a helpful tool to secure financing, weigh the potential consequences with open eyes.
Introducing Chipkie: Simplifying Family Loans Managing loans between loved ones can feel awkward. Chipkie is a fantastic tool that streamlines the process, offering features like:
- Effortless Loan Setup: Clear agreements created in minutes.
- Official Protection: Legally sound contracts signed electronically.
- Transparent Tracking: Easy monitoring of loan status and payments.
- Discreet Reminders: Gentle notifications for smooth repayment.
- Flexible Repayment Options: Customizable schedules based on financial situations.
- Dispute Resolution Support: Resources for rare disagreements.
Chipkie’s market research proves its value, and it brings additional social benefits like reduced stigma, financial literacy, and protection against predatory lenders.
Final Thoughts Helping your child achieve homeownership is incredibly generous, but both parties need protection. By considering potential risks and utilizing tools like Chipkie, you can maintain strong relationships while lending responsibly.
