September 2020

The Bank of Mum and Dad - Inter Family Lending



With the Covid-19 pandemic banks appear more cautious with lending.  In some cases parents are being called upon to financially contribute towards their children’s property purchase.  The way this financial assistance is recorded is usually dictated by the bank but parents should look at their risks before jumping in to lend a hand.  Some examples of the options for assistance are:

GIFT – it’s gone

If money is gifted you cannot ask for it back later.  It is not a debt.  A gift could have implications for you further down the track:

·         It may change family dynamics if all children aren't treated equally.

·         If your child and their partner separate in the future, has that gift been protected as your child’s separate property or will they lose that money in a relationship property settlement?

·         Will there be implications if you need residential care later in life?

LOAN – the funds will come back… eventually

You have the option of calling up on this loan later.  The terms of the loan including repayments, interest charges, the length of the loan and expectations around these must be clarified and documented in writing. You also should consider what happens to this loan if you pass away.  Would the debt be forgiven in your will or does it need to be repaid to your estate?

SHARED PROPERTY OWNERSHIP – do you want a share?

You could be registered on the title as a co-owner in shares with your child reflecting your contribution.  Expectations of each party should be recorded in an agreement covering outgoings, (rates, insurance, mortgage payments), occupation and maintenance of the property.  The agreement should also cover what happens on sale, death or separation including who receives or shares in any capital gain.  This option could impact your financial position in the future and needs to be considered carefully.

GUARANTEE – you’re it

When you provide a guarantee, the bank can look to you first if your child defaults. Any guarantee should be limited to the amount of lending rather than being unlimited, otherwise your child could increase their lending without your knowledge. It is important to seek independent advice regarding guarantees to ensure you are aware of your obligations and risk.

Inter family lending is complex.  It is important that you, your child and their partner agree how the financial contributions are to be treated and that agreement is recorded in writing.  This will reduce the risk of unintended consequences and disputes further down the track.