The ‘Bank of Mum and Dad’ relies overwhelmingly on one source of capital: home equity. For many Australian parents, the value built up in their principal residence is the single largest asset they possess, and it’s increasingly being leveraged to help children enter the property market, start a business, or consolidate debt.
Using home equity for family support is a powerful act of generosity, but it carries profound risks for the parents’ financial security and retirement plans. This process transforms your home from a sanctuary into a financial instrument, and the resulting transactions—whether a cash loan or a bank guarantee—must be formalised with professional rigour. Failure to do so exposes the equity to loss through divorce, bankruptcy, or estate disputes.
The Two Primary Ways to Use Home Equity for Family Support
There are two distinct and highly regulated ways parents typically use their home equity, each carrying a different risk profile:
1. The Cash Loan (Drawing Equity)
This involves the parent approaching their bank to draw a lump sum of cash or establish a Home Equity Line of Credit (HELOC) against their own property. They then privately loan that cash to their child.
- Mechanism: The parent refinances their mortgage or establishes a second mortgage, withdrawing the usable equity (usually up to $80\%$ of the home’s value, minus the existing mortgage balance).
- The Risk: The parents now carry the full commercial debt. If the child defaults on the private family loan, the parents are still obligated to repay the bank, secured by their family home.
- The Solution: The funds provided to the child must be protected by a formal loan agreement (a promissory note) to ensure the debt is legally recoverable. Without documentation, the transfer is easily deemed a gift in the Family Court, and the parents’ drawn equity is lost forever if the child divorces. Read our comprehensive guide on avoiding the “Gift vs. Loan” Tax Trap here.
2. The Guarantor Loan (Securing the Bank’s Debt)
This is the most common use of home equity for family support to help a child buy a house.
- Mechanism: The parent uses a portion of their home equity as collateral for the child’s mortgage. The parent does not provide cash, but they limit their liability to the deposit amount (usually $20\%$), helping the child avoid Lenders Mortgage Insurance (LMI).
- The Risk (The Guarantor Trap): If the child defaults on their bank loan, the bank has the legal right to enforce the guarantee and claim the security interest against the parent’s home. The parent is liable for the full guaranteed amount, risking their own principal place of residence.
- The Solution: This arrangement requires a clear exit strategy with the bank, typically agreed upon once the child’s loan-to-value ratio (LVR) drops below $80\%$ due to capital growth or repayments.
The Dual Threat to Retirement and Pension
Using home equity for family support has consequences that extend beyond the property itself, directly impacting the parents’ financial independence.
Age Pension (Centrelink) Impact
For retired parents, providing financial support can trigger Centrelink’s gifting rules:
- Any amount gifted over $\$10,000$ in a financial year (or over $\$30,000$ across five years) is treated as a deprived asset and continues to be counted against the parents’ asset test for up to five years.
- This can result in a reduction or loss of Age Pension entitlements, meaning the parent loses tax-free income, even though the money is no longer in their account.
Undermining Financial Resilience
By increasing their own mortgage debt (Method 1) or restricting their borrowing capacity (Method 2), parents compromise their own financial safety net. They lose the flexibility to refinance, downsize, or access equity for their own medical or retirement needs later in life. This generational support risk can flip the relationship, leaving the children potentially having to support their parents later.
Protecting Your Home and Your Intentions
Whether you choose a cash loan or a guarantee, clear legal documentation is your only true defence against unintended consequences like divorce or bankruptcy.
- Addressing Sibling Fairness: If you use home equity for family support for one child, the loan agreement must be integrated into your estate planning to ensure fairness among siblings. Your Will should clarify whether the outstanding debt is to be repaid by the borrower or forgiven upon your death.
- Family Court Risk: The only way to ensure the funds remain a liability (debt) that must be repaid from the marital pool during a divorce is by establishing a formal, commercial arrangement with regular repayments and documentation.
The decision to leverage home equity for family support is a beautiful expression of love, but it must be an informed one. Always seek independent financial and legal advice before encumbering your home.
Secure Your Home Equity for Family Support with Chipkie
The legal risks associated with tapping home equity for family support are too significant to manage with an informal conversation. Chipkie helps you formalise the internal loan (Method 1) created when you draw equity, ensuring your money is protected and recoverable. We provide legally compliant loan contracts that establish clear repayment terms, track all transactions visually, and create the undeniable audit trail needed to defend the loan’s status in Family Court and with the ATO. Chipkie adds the necessary layers of safety, certainty, and transparency to your generosity, allowing you to help your family achieve their dreams without risking your own financial foundation.
Disclaimer
Disclaimer: The information provided in this article is for informational purposes only and should not be considered financial advice. We always recommend consulting with a financial professional before making any financial decisions.
