It is not unusual for parents to advance their children money. It could be for their first car, grandchildren’s school fees, a holiday, medical expenses or even a superannuation contribution.
In recent years, it has become increasingly common for parents to help their adult children with a home deposit. The decision to extend financial help to adult children comes as the property market booms and home prices push ownership further out of reach of first-time buyers. It is a daunting task for first-home buyers to save sufficient funds for a deposit.
A recent Australian Financial Review report found that over 60% of first-home buyers in Australia receive some form of financial assistance from their parents. The average amount parents are contributing has risen to $93,000 – a 26% increase in the last twelve months. The ‘Bank of Mum and Dad’ is rapidly becoming one of the nation’s biggest property lenders and is estimated to be collectively worth about $35 billion, according to an analysis by the Digital Finance Analytics.
If you’re a parent and considering assisting your adult child by contributing funds to the purchase of a home, the first consideration should be whether you are gifting the money or loaning the money. Simply giving away the money has risks. Demonstrating whether funds are a gift, or a loan is particularly important in situations where there might be a future breakdown of a relationship and a child is involved in family law proceedings, when a child dies or if a child becomes bankrupt.
To eliminate the risk of your money not being repaid in the future (eg. if the relationship goes sour or if things go off course) or the risk of your child losing a portion of the money in family law proceedings, we strongly suggest a written Loan Agreement is entered into. A Loan Agreement not only protects your own interests but also benefits the child as you can still decide in the future to forgive the loan while you are alive or in your Will.
Like most other contracts, a Loan Agreement is drafted to set out the intention of the parties and rights of each party. It is physical evidence that can be referred to if disputes arise.
We regularly act for individuals or companies who loan money to friends, family or other companies for the purpose of assisting with property purchases or investments.
Taking into consideration the implications that can arise when a money is loaned or gifted to a borrower, it is vital that lenders are well advised of the consequences. Remember – knowledge is power – so, if you would like to discuss a parent to child loan or any sort of loan, please contact our firm to arrange an appointment.