Experts say it’s important to finalise any loan agreements with your children.
Forget Commonwealth, ANZ, or Westpac, The Bank of Mum and Dad has entered the market and is now the 10th largest lender in Australia, with loans totalling over $35bn.
They’re guaranteeing mortgages, providing deposits, and interest-free loans, along
with a wide array of other financial benefits, such as paying private school fees.
While the Australian Bureau of Statistics doesn’t directly track this additional assistance,
various reports show that it is widespread.
According to Finder, more than 60 per cent of first home buyers receive help from their parents.
Amounts vary but can exceed $100,000.
But experts say it’s important to formalise any loan agreement with children — otherwise it’s legally considered as a gift, which can lead to problems down the track, especially if the child splits with their partner.
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Paul Etherington, Principal of Etherington Solicitors in North Sydney, says: “The beauty about codifying it as a loan agreement is that if the house is sold as the result of a breakup, that money will definitely come back to the parents.
“A loan is always a loan and must be repaid.”
Other experts, such as Diana Perla of Perla and Associates in Bondi Junction, say it’s important to keep the loan agreement current until it’s paid back in full.
“I have a client who had lent her daughter 400k when she got married,” she said.
“They had signed a loan agreement — but when the daughter and her husband separated many years later, the loan agreement had lapsed and the husband said he no longer considered it a loan and refused to pay it back.”
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One of the biggest factors is how the Bank of M&D helps young people get into the property
market by allowing them to borrow less.
As real estate prices have soared in the past few years, it often is the only way they are able to get into the market, as their savings can’t keep pace with the rising cost of housing.
“It is increasingly popular to help children get onto the financial ladder,” says Georgina
Goldsmith, financial advisor at Lux Financial Planning in Paddington.
“Interestingly, it is often framed as a benefit to the parents themselves — getting to witness their children thrive and enjoy some of the inheritance early.
“In other cases, it’s positioned as something modest — just giving them a little helping hand.
“Regardless of the motivation, we are seeing more families normalise this type of support.
“Children are remaining financially dependent on their parents for longer.
Diana Perla, of Diana Perla & Associates in Bondi Junction: “The husband said he no longer considered it a loan and refused to pay it back.” Picture: Renee Nowytarger
“The level of dependency varies, but it is a role that parents are commonly embracing.”
Generally speaking, parents have more means these days.
Over $3.5 trillion in wealth is anticipated to transfer between Baby Boomers and their offspring over the next two decades, either through inheritance or gifting.
This is why intergenerational wealth and gifting is front of mind for many, says Goldsmith.
Wanting to give your kids a helping hand is only natural — many parents are keen to see their children get on the property ladder.
But what is the best way of doing it? And how can you protect your financial interests in the case of ‘loaning’ or ‘gifting’ your kids’ money?
There are several ways you can help your kids buy a home – gifting a deposit, giving a loan, acting as guarantor, or even co-buying the property.
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But each option has different implications for the parent and the child, so the most important thing before you gift or loan your kids money is to get professional advice.
And you need to be crystal clear about what you are doing.
Is it a loan or is it a gift? Or a hybrid part loan/part gift?
“There is often confusion on the part of the parent and the adult child,” says Goldsmith.
“That’s why it is so important to engage a professional at the outset who can mediate the negotiations, document discussions and clarify the intentions in terms of a gift or a loan.
This can be crucial down the track, if there were ever to be disputes.”
If Monopoly taught us anything, it’s that money can tear apart even the most stable family.
That’s why it’s essential that everyone involved is on the same page and comfortable with the
arrangements — and understands what options they have if one side fails to comply with the
terms of that arrangement.
Paul Etherington, of Etheringtons Solicitors: “A loan is always a loan and must be repaid.” Picture: Jen Horgan
You don’t want to end up in a legal and emotional battle with your family members.
The North Sydney solicitor Paul Etherington says: “What is happening a lot these days is that parents are entering into loan agreements with their blood child, and not involving the partner, to minimise the risk of dispute.
“Buying with your kid has certain triggers for taxation.
“If you buy with your kid and own 10 percent of the property, that 10 percent is liable for capital gains tax, and also potentially land tax.”
Being a guarantor also comes with implications, advises Goldsmith.
“You need to consider whether you are in a financial position to repay the full debt, plus interest if your child is unable to do so.
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“What have you offered as security? And are you comfortable with the
possibility of selling this asset to repay the loan?”
If you’re intent to borrow for a loan in the future, guaranteeing another loan may affect your borrowing capacity.
Diana Perla, who specialises in family law, de facto relationships and property law, says that it’s not only first- home buyers, but also when people are divorcing that the Bank of M&D comes in, in particular to buy a partner out.
She also agrees that that matter of whether or not it’s a loan or a gift needs to be discussed clearly.
“Let your children work, save, and create their own wealth,” advises Etherington.
“When a parent gives money to kids, it’s considered a gift unless it’s stated as a loan – it’s
known as the presumption of advancement,” Perla says.
“If there is no loan agreement, then the parents cannot claim the money back later. It is viewed as a gift.
“People sometimes enter into loan agreements, and no-one calls on the loan, so then you run
into the statute of limitation.
“I have a client who had lent her daughter 400k when she got married.
“They had signed a loan agreement – but when the daughter and her husband separated many years later, the loan agreement had lapsed and the husband said he no longer considered it a loan and refused to pay it back.”
Sometimes parents are so keen to help their kids that they don’t take their own circumstances
into account.
Goldsmith says that plenty of parents get swept up in the excitement of helping
their children, but too often, they underestimate the impact on their own long-term financial
security.
”Parents should be aware of the various curveballs,” says Goldsmith.
“Parents should be aware of the various curveballs that can come their way throughout
retirement and how each one would impact the longevity of their capital.
Firstly, will your cashflow sustain your lifestyle across your projected lifespan? Have you accounted for large expenses such as medical bills, serious home repairs, or the cost of aged care? Are you prepared for the possibility of needing full-time assistance? You should run these scenarios with your financial advisor before making any decisions about gifting. It’s critical that generosity doesn’t come at the expense of your own wellbeing.”
While everyone wants to help their kids, they should also consider their partners in this gifting scenario. How will they be impacted by your generosity?
Etherington says that “In my opinion, you should always look after your spouse ahead of your children, because that spouse will be looking after you. To think you must put your children ahead of the spouse is wrong.
“Let your kids work, save and create their own wealth.”
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