Running the Bank of Mum and Dad – Failing to plan is planning to fail

With rising inflation, interest rates hikes, increasing costs of living, and a property market boom - it should come as no surprise that the “Bank of Mum and Dad” in Australia (parents lending directly to their children to help with homebuying) is estimated to be collectively worth about $35 billion, making it the nation’s ninth-largest mortgage lender.

It’s understandable why so many choose to help in this way. It allows their children to enter the property market when they might otherwise be unable to, can remove the need for Lender’s Mortgage Insurance, and can help them secure a better interest rate. It’s also a benefit to many parents to be able to help their children now, rather than leaving funds in their Will.

There are two common ways for parents to help  their children; to gift or loan them money for a house deposit, or to act as guarantors on a home loan.  

Unfortunately, what often starts with the best of intentions can end in disaster, with instances or allegations of financial elder abuse and the breakdown of family relationships.

Where things can go wrong:

• If the child’s relationship breaks down, and the funds become part of family law property settlement
• If the child goes bankrupt
• If the relationship between the parents and child breaks down
• If the child disputes if the funds were a gift or a loan
• If the parents want or need their funds to be repaid
• Centrelink implications
• Sibling jealously
• Estate planning issues
  

How to best minimise the risks

1. Document everything. 
   No family wants to imagine that anything could go wrong.  People don’t get married expecting to get divorced either. A handshake agreement is not enough. 
   
   
2. Obtain independent legal advice.
   You and your children should not meet with the same lawyers. Without independent legal advice, any agreement could potentially be set aside.
   
   
3. Be clear if you want the funds to be considered a gift or a loan.
   A gift is just that - you give the funds with no expectation of them being returned. A loan, however, has an expectation that the funds being repaid. 
   

If you suspect that yourself or someone you know is being taken advantage of, it could be a sign of Elder Financial Abuse. You can call 1800 ELDERHelp (1800 353 374) for information, free advice and referrals for further support services in your state.