Bank of Mum and Dad is now Australia’s 10th largest lender.
I came across some stats the other day regarding the top home lenders in Australia. As a lawyer, it piqued my interest that the 10th largest lender in Australia is the “Bank of Mum and Dad”.
From a legal perspective, this is interesting and concerning. In many instances, and I’m sure many of you included, have been more then willing to “give” or loan your children money to get them started off in life (…or will be willing to do it when your children reach the age). It’s what most parents want to do for their children and in most cases all goes well.
The rise of the Bank of Mum and Dad has been created due to several factors:
- Increasing property values making it hard for younger ones to save deposits
- Lender demand for bigger deposits
- Tougher loan terms
- Children staying at home longer to complete studies or travel before “settling” down
- “Baby boomer” generation being the most affluent we have seen and the subsequent sharing of that wealth
Meaning, we are seeing many children knocking on mum and dad’s door – to the tune of about $20billion in the last 12 months.
As a lawyer why does this concern me?
Like most things in life, we don’t ever anticipate or believe that things can turn sour within families and often these loans or “gifts” are made without any written documentation. They are often taken for granted and nothing is specified when the loan will be paid back (if ever), what the repayments will be and what will happen if repayments aren’t made.
The increase in parental lending has seen increases in family disputes and complex legal fights as parents fight their children, children sue their parents, other siblings get involved and everything just turns into a big, unnecessary legal tussle.
The recent royal commission has highlighted stories of parents going guarantor for their children – with parents being the losers in the end – losing properties and businesses.
As a lawyer what would I do?
- Lending between families should be treated as any monetary transaction, especially if you have a business or medical practice tied up in a family trust (or similar). It is critical that any personal lending is undertaken completely separate from any business assets.
- Get everything in writing – even if you intend the money to be a gift. Have this documented so that its clear everyone understands, and other siblings are aware. If you are setting up a loan – have all the repayment details documented and consider having the loan registered against the property. Indicate whether the loan will be written off in event of death.
- If you are happy to go guarantor for your children through a bank loan (or similar) always get your own independent legal advice before signing any contracts and specify the guarantees limit.
- Update your will so that its clear how the loan will be treated as part of your estate – will it be an asset which can be recovered, or will you forgive it. Your estate will include any business assets (including your medical practice), so you want to make it very clear how this loan is handled in event of your passing.
Always seek your own financial and legal advice in these types of situations so that you ensure your well covered and nothing ends up in lengthy disputes or breakdown in personal or professional relationships.
You can check out here the three personal assets you need to protect.
* This blog is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.