Purchasing a home is not an easy feat, especially in this economy. It is one of the most significant financial commitments a person can make in their lifetime. Hence, it is no surprise that many people are leaning towards utilising their parents’ funds when purchasing a property.

However, as with anything else finance-related, the usage of the bank of mum and dad must be considered carefully by the children and parents involved to avoid any misunderstandings and problems down the road. Typically, parents who lend funds to their children for property purchases expect to be repaid without realising that their children are not legally required to do so.

Therefore, if you are a child or parent who is considering the use of the bank of mum and dad for a property purchase, here is what you need to know before making this financial commitment.

What is the Bank of Mum and Dad?

Simply put, the bank of mum and dad refers to parental funding. It is when parents – or in some circumstances, a close relative – lend money as cash gifts or act as guarantors on a home loan to assist their children in purchasing a home. In doing so, they pledge to be accountable for the house loan repayments if their children fall behind on payments.

The bank of mum and dad has become a popular option for many potential younger generation first-home buyers as the older generation hopes to help their offspring by giving them a leg up in the current real estate market.

The risks of using the Bank of Mum and Dad

As mentioned, parents tend to lend funds to their children in hopes of being repaid in the future. However, without a legally binding loan agreement, the money is considered a gift and they cannot get it back when needed.

This can cause strains in family relationships and the whole arrangement could get complicated if the circumstances of the parties involved change, such as:

Failure of relationships

This failure could be in the form of a parent-child relationship or even a spousal relationship. The latter might result in someone else profiting from the money that the parents provided to their children. In such circumstances, an undocumented transfer of funds will legally be considered a gift – which means you cannot claim your money back. Thus, if you lend money to your children in good faith or with the intention of it being a loan but have not documented it, you will be at risk of losing your money.

Financial difficulties

In the event either parties are facing bankruptcy or insolvency, a documented transfer of funds will ensure your money is protected. If it is not, parents especially, cannot claim back their funds or the property when the bank tries to repossess it.

Lack of savings

By giving away your money to your children without truly assessing the risks and taking into account unforeseen situations, you may be left in debt in the future. As many parents believe they will be repaid, even without a legally binding agreement, the risk of not having any savings, in the long run, is high.

Death

This is a taboo topic for parents and they may usually avoid factoring in the possibility of their child dying. Unfortunately, it happens and if undocumented, the money will be considered a gift, becoming part of the deceased’s estate.

These are just some of the common risks that are associated with utilising the bank of mum and dad for property purchasing – there are more unforeseen circumstances that are specific to the parties involved. However, the majority of these risks can be avoided with proper documentation from the outset.

If you are a parent and wish to give or loan money to your children for their property purchase, it is best to get legal and financial advice related to this arrangement from a family law firm to ensure that everyone is on the same page from the onset and to mitigate future problems that may arise from this disposition. It is important to know how you may be affected before you agree to anything, even if it is for your children.

Ways to use the Bank of Mum and Dad safely

It is undeniable that utilising your parents’ funds to purchase a home in this economy is an attractive option. Despite the risks, it is still the easiest and least expensive way to own a home. In some families, this may even strengthen the parent-child relationship. Therefore, here is what you can do to mitigate the risks, minimise the likelihood – or severity of – potential disputes, and ensure this arrangement is utilised safely and effectively for all parties involved:

Draft up a legal agreement

It is a fairly simple process and can be done with the help of experienced lawyers in a family law firm. The agreement must be documented as if it were an arms-length transaction to ensure that both parties do not suffer losses in the long run.

Have a secured interest

If your children declare bankruptcy or insolvency, nobody can deal with the property without your knowledge if you have a secured interest. It takes precedence over a liquidator’s or bankruptcy trustee’s rights in the event of a company or personal insolvency.

Similarly, if your child dies, you will be entitled to receive your money back from the estate if you have both a loan agreement and a secured interest on the title. This is crucial because if there are children or dependents involved, you will not receive the estate funds unless there is specific wording in the deceased’s Will.

Get legal advice before any agreement

As mentioned, the bank of mum and dad can be a risky agreement for parents and children to enter into. Different families have different dynamics, thus resulting in unpredictable outcomes when it comes to financial-related matters.

If you are still considering the use of the bank of mum and dad to purchase a home, you should seek legal advice from Melbourne’s best lawyers to avoid any problems that may arise from a lack of proper documentation and consideration. A legal professional can also help you draft up the best agreements to suit your circumstances, so ensure to get the proper advice and consultation before making any financial decisions.