The Bank of Mum and Dad: Legal risks and insights
As cost of living pressures rise, more homebuyers are turning to family to help them get onto the property ladder – but at what price?
The Bank of Mum and Dad is a term that has been rising in use (and importance) over the last few years, as young Aussies – and some not so young – enlist the financial assistance of their parents to help them buy their first home.
In March 2022, the Australian Financial Review reported that Australian parents are "stumping up around $90,000 per adult child on average towards the [home loan] deposit – an increase of more than 20% in the past 12 months".
This staggering rise in home loan parental assistance has been the result of falling "real" wages, a property market boom, rising inflation, climbing interest rates and more cumbersome lending requirements, on top of the increasing cost of food and commodities. And these financial pressures don't show much sign of easing.
As more families take advantage of the Bank of Mum and Dad, it's important to help people understand they can legally protect themselves and their assets when they are providing financial assistance.
What are the benefits and risks of the Bank of Mum and Dad?
There are benefits and risks for the borrowers (i.e. you, or your children) and the mums and dads supporting their children, so it's worth considering these separately.
Benefits for borrowers
When it comes to financial assistance from the Bank of Mum and Dad there are a lot of benefits to the child (or the borrower). These include:
- Being in a better cash position when it comes time to actually buy a home.
- Eliminating the need to personally save a 20% deposit.
- Making flexible repayment arrangements.
- Agreeing to a lower interest rate.
- More easily making variations to the terms of the loan in the future when circumstances change.
- Getting on the property ladder sooner with family financial support.
Benefits for mums and dads
The biggest benefit for parents is being able to help their children buy a home (a big Australian dream). But there are others, including:
- Being able to help your kids now (rather than once you've gone) and see them benefit from the help.
- The ability to make flexible decisions about when and how to help your children.
- Determining your own interest rate and lending arrangements rather than being governed by the bank's.
- Getting a return on your investment if you create a loan arrangement.
The casual nature of family can sometimes exacerbate lending risks. Some of the biggest ones to consider include:
- Setting up the financial assistance as an informal or handshake deal
If you don't take the time and effort to formalise your arrangement you might find that no party is protected when something goes wrong. For example:
- If the adult child's relationship breaks down, the home (or the profits from the sale of the home) may end up going to the ex-partner rather than to the child. This situation could be worsened in the case of a blended family, where children are involved. The end result may not be what the parties to the agreement intended.
- If the borrower's business fails or they suffer from a bankruptcy or other financial distress, they may not be able to repay the monies owed to Mum and Dad. With no formal agreement in place, the lending parents are simply unsecured creditors stuck in the queue with the other unsecured lenders.
- If the familial relationship breaks down, you may find that you no longer agree to the terms of the loan. One party might refuse to pay or the other might demand higher interest rates. Without a formal written agreement, you won't have any recourse.
- If there is no formal agreement, the courts aren't in a position to understand or enforce what was agreed. The parties will have no recourse to ensure their agreement is upheld.
- Not getting independent legal advice
Without independent legal advice, the courts could simply set aside the loan or financial agreement as unenforceable. This means they can't and won't enforce the loan.
- Not creating a security on the home
In the situation where the financial assistance is in the form of a loan, you must ensure that the home is acting as security for the loan. This ensures that the lender (or lenders) will be the first to be repaid in the case of a bankruptcy or other financial disaster.
How to manage the risks of using the Bank of Mum and Dad
Through my work at Australian Family Lawyers, I have seen first-hand how well the Bank of Mum and Dad can work when some ground rules are established, but I've also seen how quickly things can go sour.
As long as you take the right steps, the Bank of Mum and Dad can be a fantastic option (as the benefits clearly show). But it is important to understand how to legally protect that financial gift, loan or advance so you can mitigate against the risks that could arise if something unplanned occurs.
The 3 most important steps to mitigate against any risks are to:
- Get independent financial advice. First, ensure that every party to the financial agreement has their own independent legal advice. This means that each party should have their own lawyer who will give advice on the arrangements and review the documentation. It's important that this also includes the spouse of the child receiving the financial benefits.
- Formalise the agreement. Second, the agreement must be formalised in a written and legally executed and enforceable agreement. This will need to be done by a qualified lawyer.
- Take security against the property. Third, if the agreement is a loan, it's important to take security against the property. This ensures that a lender is a secured lender and will be first in line if the borrower finds themselves in financial difficulty.
There's no doubt the Bank of Mum and Dad is big business. My recommendation is that when it comes to big business, it pays to speak to an expert.
This will ensure that you get the advice and protection you need to confidently take advantage of the Bank of Mum and Dad and secure your family's future.
Barry Frakes, practice leader and head of asset protection at Australian Family Lawyers, has practised family law since 1985. After 8 years of private practice as a solicitor in family law and criminal law, he was recruited to the family court in Parramatta as a deputy registrar. Barry's experience covers litigation practice in the family court and NSW local, district and supreme courts. His confidence in the courtroom and in negotiation is based on his work as an advocate, his intimate knowledge of family courts' procedures and his experience in negotiating fast settlements for hundreds of separating clients.
Disclaimer: The views and opinions expressed in this article (which may be subject to change without notice) are solely those of the author and do not necessarily reflect those of Finder and its employees. The information contained in this article is not intended to be and does not constitute financial advice, investment advice, trading advice or any other advice or recommendation of any sort. Neither the author nor Finder has taken into account your personal circumstances. You should seek professional advice before making any further decisions based on this information.
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