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How to be the bank of mum and dad without losing out
Don’t just be the bank of mum and dad; one lawyer is advising parents to act like a bank, too, by lending the money with a properly written loan agreement.
How to be the bank of mum and dad without losing out
Don’t just be the bank of mum and dad; one lawyer is advising parents to act like a bank, too, by lending the money with a properly written loan agreement.
Brian Hor, a special counsel with Townsends Business & Corporate Lawyers and expert in estate planning and superannuation, has urged parents aspiring to help out the kids in an ever-more expensive property market to act like a real bank when they do hand over the money.
He highlighted some of the “real risks” associated with just providing their children with the money, flagging three areas where parents can run into trouble:
Real risks of lending money to your kids
- The “King Lear” trap
“He gave his kingdom away to his daughters in return for their promises of love, and when they got what they wanted they dumped him (more or less),” the lawyer said.
“Don’t let that happen to you!” Mr Hor warned.
- The breakdown of a relationship
“What if you give your money to your child and they go through a relationship breakdown?” he asked.
When the dust settles, parents usually want to avoid half the money (or more) going to the ex but may not be able to have such a say.
- Creditors or lawsuit predators
Mr Hor stated that these days, “young people are increasingly striking out on their own, whether as a side gig or as their main occupation”.
But, as the lawyer warned, if bankruptcy befalls your child, or they fall victim to a frivolous but successful lawsuit, “your gift to them may be exposed”.
Lending money like a bank
To avoid falling into the above pitfalls, Mr Hor argued that parents should be lending money to their children “with a proper written loan agreement, secured by a registered mortgage over the home”.
“Just like a bank.”
You probably won’t be able to get a first mortgage, the lawyer explained, because the bank will want that, but “you can usually get a second registered mortgage”.
This means that once the bank is paid out, you will be next in line.
While your child might prefer a straight-out gift, the lawyer considered that providing money in this way means “you are still helping them out in a big way”.
Mr Hor said it also importantly means three things:
- Just like a bank, you are the child’s lender, and can call in the loan if your child does default on it.
- If your child suffers a personal financial crisis, whether that be the result of a business failure, lawsuit or relationship breakdown, the amount of the loan (possibly with interest) can be reclaimed by you.
- Depending on the loan’s terms, you may even be able to call in the loan in the future if you do need the money for yourself, “perhaps to fund aged care”, Mr Hor offered.
Does your child have a partner?
In this case, what you do will depend on in whose name the home will be purchased, Mr Hor noted.
“If the home will be purchased in the name of your child alone, then the loan agreement and mortgage will bind your child alone,” he said.
In this case, your child’s partner has no say in the matter.
But what if the home is purchased in both the names of your child and their partner?
In that case, Mr Hor said “the loan and mortgage will need to bind both your child and their partner to enable the mortgage to be registered over the home”.
As always, it’s best to consult with a lawyer on these types of matters.
In conclusion, Mr Hor urged parents to remember that they need to protect their own interests first.
“In so doing, you are also protecting your child, because one day you may well decide to forgive the loan or you may actually give the benefit of the loan to your child in your will as part of their inheritance.”
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