Gifts, loans and the bank of mum and dad
3 mins reading time
In 2021, we anticipated the ‘bank of mum and dad’ would play a greater role in helping family members purchase their first homes or upgrading their current home, as residential property values in the major cities and regional areas increased.
Family lending on the rise
Despite numerous forecasts that house prices would fall in 2023 due to higher interest rates, prices briefly dropped but then quickly rebounded in 2023. A recent Domain article identified that about 15% of borrowers were using some sort of family assistance to buy a home, with family assistance being a potential factor in 2023’s V-shaped property prices.
Young borrowers, whether single, in a de facto relationship or married, seek and receive a lump-sum payment from family to assist in acquiring a property. Sometimes, the transaction is recorded in loan documentation or a Financial Agreement, other times it is made with a handshake or a kiss on the cheek.
From a legal perspective, correctly documenting the monies received from family is crucial.
Is it a gift or a loan?
Imagine a future scenario where the recipient’s romantic relationship breaks down and their soon-to-be ex asserts that the monies advanced were a gift and not a loan, the loan was “on paper” only and not expected to be enforced, they didn’t understand what they were signing, and/or they were put under unfair pressure and signed an agreement against their will.
It may be important to prove that the monies advanced were a loan and not a gift. The difference between characterising the advancement as a gift or as a repayable loan can amount to a substantial amount of money. Properly structured agreements can protect the money against a family law claim.
In law, there is a presumption that monies advanced by a parent to their adult child is a gift rather than a loan. The presumption may need evidence to show that the intention of the parties that the monies advanced should be repaid.
Write that down – the importance of documentation
Without a loan agreement or Financial Agreement (made before, during or after a de facto relationship or marriage), the presumption of advancement will probably not be rebutted.
Seeking legal advice before any transaction is advisable, with clear documentation involving all parties.
To mitigate against risks of enforceability, surrounding circumstances should show that all parties fully understood the nature of the transaction. Where possible, the bank of mum and dad, should take the position of a financier and have documentation in place to substantiate the loan including lodging a mortgage (whether a first or second mortgage) with a deed of priority and subordination with the primary mortgagor. In documenting this, each party should receive appropriate legal advice to guard against any future assertion of fraud, duress or other threatening behaviour. The recipient and his/her partner’s contributions or non-contributions to repayment of the loan should clearly recorded.
We’re here to help
If you or your clients are considering giving or receiving an inter-family advance that you wish to protect against a future family law claim, please reach out to Brendan Herbert, Principal, Family or Meileng Tam, Special Counsel, Commercial.
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Gifts, loans and the bank of mum and dad
In 2021, we anticipated the ‘bank of mum and dad’ would play a greater role in helping family members purchase their first homes or upgrading their current home, as residential property values in the major cities and regional areas increased.
Family lending on the rise
Despite numerous forecasts that house prices would fall in 2023 due to higher interest rates, prices briefly dropped but then quickly rebounded in 2023. A recent Domain article identified that about 15% of borrowers were using some sort of family assistance to buy a home, with family assistance being a potential factor in 2023’s V-shaped property prices.
Young borrowers, whether single, in a de facto relationship or married, seek and receive a lump-sum payment from family to assist in acquiring a property. Sometimes, the transaction is recorded in loan documentation or a Financial Agreement, other times it is made with a handshake or a kiss on the cheek.
From a legal perspective, correctly documenting the monies received from family is crucial.
Is it a gift or a loan?
Imagine a future scenario where the recipient’s romantic relationship breaks down and their soon-to-be ex asserts that the monies advanced were a gift and not a loan, the loan was “on paper” only and not expected to be enforced, they didn’t understand what they were signing, and/or they were put under unfair pressure and signed an agreement against their will.
It may be important to prove that the monies advanced were a loan and not a gift. The difference between characterising the advancement as a gift or as a repayable loan can amount to a substantial amount of money. Properly structured agreements can protect the money against a family law claim.
In law, there is a presumption that monies advanced by a parent to their adult child is a gift rather than a loan. The presumption may need evidence to show that the intention of the parties that the monies advanced should be repaid.
Write that down – the importance of documentation
Without a loan agreement or Financial Agreement (made before, during or after a de facto relationship or marriage), the presumption of advancement will probably not be rebutted.
Seeking legal advice before any transaction is advisable, with clear documentation involving all parties.
To mitigate against risks of enforceability, surrounding circumstances should show that all parties fully understood the nature of the transaction. Where possible, the bank of mum and dad, should take the position of a financier and have documentation in place to substantiate the loan including lodging a mortgage (whether a first or second mortgage) with a deed of priority and subordination with the primary mortgagor. In documenting this, each party should receive appropriate legal advice to guard against any future assertion of fraud, duress or other threatening behaviour. The recipient and his/her partner’s contributions or non-contributions to repayment of the loan should clearly recorded.
We’re here to help
If you or your clients are considering giving or receiving an inter-family advance that you wish to protect against a future family law claim, please reach out to Brendan Herbert, Principal, Family or Meileng Tam, Special Counsel, Commercial.