The bank of mum and dad for property: how to protect yourself when lending money to your kids

As the property market continues to boom and prices skyrocket, it is even more likely than ever you’ll get a call from your adult children asking for some financial help to buy a home.

Add in that the Australian Prudential Regulation Authority recently made it harder for homebuyers to borrow cash and it’s making the “Bank of Mum and Dad” the hottest new lender on the block.

As family lawyers we see many disputes over financial issues and, unfortunately, we are tipping we will see more legal fallouts from these intergenerational loans.

So, these are my top three tips if you plan to give your family a financial leg up on the property ladder:

1. Decide if the money is a gift or a loan

Not everyone can afford to give their children money and those that can afford it may only be able to provide it as a short-term loan, with the expectation the money will be paid back. You need to set clear expectations of this arrangement at the start. You must be clear if it is a gift, that you are happy for it to remain so, no matter what happens down the track, or if it is a loan that you expect to be paid back.

It might be that you give the money to your adult son and his wife or partner, who use it to buy a property. You need to decide if it is a gift to be shared equally between them, a gift only to your son or a loan you expect to be paid back.

If your son and partner later part ways then the house becomes an asset as part of their property settlement. If your money is a gift to them both it remains part of the settlement to be shared between them, and you have no legal claim to get that money back.

If it is a gift to your son only, he might be able to have that recognised as his contribution in court, but again that doesn’t mean that the parent who gifted the money will be paid back.

If it was a loan, you would have some legal standing like any other creditor to recover your money when the house gets sold, as part of the divorce settlement. You get paid back just like the mortgagee bank would when the house gets sold and then the balance of the sale proceeds gets divided between the couple as the orders or agreement provides.

The real risk is not being clear – in writing – with both the son and his partner about the money being a gift or a loan at the start of the process. You can’t change your mind and fall back on the security of a formal agreement later if it doesn’t exist!

2. Secure your loan with a clear loan agreement – a mortgage secured on title

If you decide your money is a loan then you need to secure that loan against the purchase of the house that your family member is buying. If you do this, it means your loan is secured and has priority to any unsecured third-party creditor. Say, for example, your family member and/or their partner is declared bankrupt, and they are forced to sell their home to pay their debts, then you won’t have to join the queue of creditors getting just a few cents in the dollar owed to them.

You will have legal access to your money with the sale of the house just like a bank gets paid first when the house gets sold. The secret is taking security. If they have a bank mortgage as well, then the bank may be the first mortgagee (and so gets paid first) and then you would be the second mortgagee and get paid second, and the other unsecured creditors divide what is left between them.

3. All parties should get independent legal advice on the family loan

Just like a standard bank mortgage where you have legal documents setting out your rights and responsibilities, take the legal steps that will ensure your money is protected and your agreement is clear and enforceable. We recommend all the parties – your child, their partner, and yourselves – seek independent legal advice before you hand over your hard-earned cash.

In my experience, while it might not feel like it, it really is an act of love for all parties to have legal documents drawn up in a case like this. It shows that you care for and respect each other. It gives you all certainty and security and will mean clarity if there is a relationship change. It’s not a sign that you don’t trust anyone. If you are worried that one or both might be offended, you can assure them that the major reason is that you need security to take priority over other creditors outside the family if something awful happens. A slightly awkward conversation now and some legal documents and independent legal advice could save you years in court or being dragged into a messy, emotional dispute.

The Starts at 60 survey shows 78 per cent of over digital-savvy over-60s have financially helped family members with buying property.  It shows so much generosity, don’t let your kindness risk your financial security. It is always prudent to seek legal advice from a family law professional about personal loans.