- The average Bank of Mum and Dad contribution is now $93,000
- However, there can be financial and legal ramifications when gifts or loans are not documented sufficiently
- Other risks include relationships with family members - situations do change
In his first opinion piece for The Property Tribune, Barry Frakes, Practice Leader and Head of Asset Protect at Australian Family Lawyers, discusses the legal logistics of borrowing from the Bank of Mum and Dad – one of the largest lenders in Australia…
For so many would-be first time home buyers, getting into the property market has become increasingly difficult. COVID pressures, rapid pricing increases and even recent lending changes has meant that more and more are turning to the Bank of Mum and Dad for a leg up.
In fact, the Bank of Mum and Dad is now the ninth largest lender in Australia and, as the AFR reports, 60% of first time home buyers are receiving the gift of financial assistance to help them scramble onto the elusive property ladder.
The average contribution is also on the rise, coming up to a record $93,000 in 2021.
With these kinds of numbers of course there are concerns.
What are the risks of taking a gift or a loan from the Bank of Mum and Dad?
What if you’re the one giving the gift?
Most people are unaware of the possible consequences. So does this mean you shouldn’t consider opening an account at the Bank of Mum or Dad?
Well, no it doesn’t. But it certainly pays to be prepared.
The benefits
The benefits to the Bank of Mum and Dad are easy to understand. It is, after all, a colloquialism for parental lending. Having the ability to help out loved ones is one of the main benefits to this type of ‘lending’.
But there are other benefits as well. It also enables children to get onto the property ladder, to leave home sooner and to start putting their money towards an asset, rather than towards paying rent. It can also help loved ones to buy a better property, or make a better investment than they might otherwise be able to afford.
The Risks
On the other hand, there can be risks to this type of monetary transfer. There can be financial and legal ramifications when gifts or loans are not properly documented.
There can be relationship difficulties if one or more family members feel excluded from a financial gift or agreement, particularly in a blended family situation. And there can be problems if relationships fall apart (such as the child’s marriage) or situations change (such as a job loss) in the future and the nature of the gift or loan hasn’t been clearly set out and legally documented.
Questions to consider..
Gifting, loaning or advancing monies to family members and loved ones can be a great solution to a difficult property environment. But every party must understand the intention, and that intention must be documented correctly.
Gift or loan?
The first thing you want to ask yourself is whether the transfer is a gift or a loan? There is a legal answer here that may have nothing to do with what you intend.
If you intend on the transfer being a loan you’ll need to ensure that you’ve got written confirmation of that fact. If the money or asset that is given is less than market value, it could be considered a gift regardless of your intention. In that case the lender could lose their ability to enforce any repayment, significantly impacting on their future.
It’s important to remember that some monetary transfers are more likely to be viewed as gifts. These include payments for grandchildren’s tuition or depositing money into a trust fund that the donor doesn’t control. In these situations it’s even more important that your intention is clearly laid out in formal and contemporaneous documentation signed by all parties.
Gifting limits, tax consequences, familial fairness and record keeping
There are other questions to consider related to gifting limits, tax consequences, familial fairness and record keeping.
In some cases what you’re allowed to gift to a loved one is limited and any transfers above that amount could affect Centrelink payments, among other things.
And though generally these gifts are tax free, this won’t hold true if you’ve created a fund to house the money for future payments.
Other considerations will be needed to ensure that the inheritance remains fair for family members who are not part of the specific intergenerational wealth transfer, and that you’ve retained the proper records for the relevant transactions. Each of these could impact on the future of your particular Bank of Mum and Dad and on the future of the individuals who are part of the transactions.
If it’s worth doing, it’s worth doing well
Lending, gifting or advancing money to help loved ones get ahead can be a wonderful thing. Advantageous for the recipient, and a valuable contribution for the donor. Plus it feels good.
But ensuring you get the right advice—whether you’re the one contributing the money or receiving the money—will save you from misunderstanding, protect you from legal ramifications and create exactly the result you’re looking for. This gives your Bank of Mum and Dad peace of mind.
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Barry Frakes, Practice Leader and Head of Asset Protect at Australian Family Lawyers, has practiced Family Law since 1985. After eight years private practise as a solicitor in Family Law and Criminal Law, he was recruited to the Family Court at 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 Court room and in negotiation is based on his work as an advocate, his intimate knowledge of the Family Courts’ procedures and his experience in negotiating fast settlements for hundreds of separating clients
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The content of this article is provided for information purposes only. It does not constitute legal advice and should not be used as such. Formal legal advice should be sought in particular matters as every family situation is unique.
