The bank of Mum and Dad: Why you need to be more like a bank than you'd think
The bank of Mum and Dad has become Australia’s busiest financial institution in recent times, and one of the few that doesn’t follow the Reserve Bank’s tune! With rising interest rates and property prices – not to mention the reflected increase in home equity for long time homeowners – parents often feel compelled to give their children a leg up in the property market.
But what happens when relationship breakdowns mean the property you helped your kids buy has to be sold? You wanted your hard-earned cash to help your children, not their former significant other.
The more commercially savvy may scratch up a “one pager” agreement, or may even google a pro forma loan, hesitant to spend the money on a lawyer to draw up a proper loan agreement. Chances are this cheaper option will cost you – or your kids – more money in the long term.
Courts will look at whether the parties genuinely intended to be lender and borrower. Without key commercial aspects such as consideration for the funds like interest, and an ascertainable loan term it’s likely your loan agreement will be deemed unenforceable. Practically this means you’ll have to fight to get the loan advance back without the standing you could have had if you’d had a proper loan agreement drawn up, and a mortgage registered over the property.
At this point you’re probably thinking woah! I don’t want to charge my child interest like some mercenary. Why do I need to register a mortgage? I’m not a literal bank. Well, the fact is that whilst these facets of a loan will make it more enforceable against a third party, it doesn’t mean you need to enforce it. You can elect to discharge the mortgage and forgive the loan whenever you choose. You can also make provision in your wills for forgiveness of the loan in the event of your death.
In other words, if you put a proper loan agreement in place you have the power to make decisions without them being thrust upon you. Don’t make the mistake of doing this on the cheap, you may regret it later.
Our property and commercial team at Kerr & Kerr Partners would be happy to assist you with a loan agreement to give you and your children peace of mind.
Lending money is a big commitment, and you should always seek independent financial advice to check what implications it may have on you. It’s also an opportune time to update your wills to make sure they reflect your current situation. Linda Kerr of our office can make sure your estate planning and wills are up to date and your assets are best protected.
By James Barnett (Senior Lawyer)