Bank of Mum and Dad: Is it worth the risk?

Interest rates are rising for the first time in more than a decade, which means Aussies won’t be able to borrow as much from the banks.

This could push many to turn to the bank of Mum and Dad to help make up the difference.

But Australian Family Lawyers head of asset protection Barry Frakes said there were a number of things to consider – from the perspective of the kids and the parents – before jumping into an arrangement.


Pros for the parents

Frakes said a lot of parents felt they could help their child a lot sooner than they were anticipating, which could help them get on their feet faster.

“You can help your kids now rather than waiting to help them after you are gone,” Frakes said.

“And hopefully by then they won’t need your help.”

Frakes said this was particularly the case when it came to getting a foot on the property ladder, with many young Australians struggling to come up with the large deposits needed.

“Your kids can get a first step in the rising property market earlier than if they waited until they had saved a big deposit on their own,” he said.

“While they are saving, the price of a home just gets further and further away.

“You can make flexible decisions about what you lend and at what rate the borrower [your kids] pays you back as you choose. That is much different from a bank, which is bound by strict lending rules.”

Frakes said it could be a good idea to still include a small amount of interest on the loan so you could still get some return on the investment.

This is especially the case if you’re dipping into your retirement savings to give a helping hand.

“If you do things correctly using Asset Protect and securing the loan you are giving against the home that is purchased, then you can be sure that you can eventually get the money back, just like a bank mortgagee does when a house is sold,” he said.


Pros for the kids

Kids who borrow from their parents may be able to crack into the property market sooner because it will be a lot easier to access finance.

“[This] is great if you are struggling with the ‘deposit gap’, spending money on rent instead of saving your deposit money,” Frakes said.

“You can make flexible agreements about repayment or the interest that is charged that a bank simply can’t give you because of the strict lending rules that banks have.”

Frakes said it could also be a lot easier for kids to talk to their parents about varying repayments in the future – if they fell on hard times or circumstances changed – than it would be negotiating with a bank.

“If you do things correctly – using Asset Protect and securing the loan against the home that is purchased – then you can be sure that you can always pay other parties back,” Frakes said.

“When the house is eventually sold, everyone knows what the deal is and that clarity should mean there are no bad feelings at the end.”

Cons for everyone involved

Frakes said it was essential – regardless of the good relationship you had with each other – to always treat the situation as a business deal.

“The loan has to be clearly described in writing and each party has to get independent legal advice – sadly just a handshake and a hug is not good enough,” he said.

“If you don’t cover all the bases, then it can cause issues within the family when one day you no longer agree about what the terms of the loan was – such as when it was going to be paid back.”

Frakes said if all the bases weren’t covered and it was just a “handshake deal”, then if something went wrong – such as the borrower going broke or there was a break-up – a court may not recognise the loan as enforceable and the parents could lose their money.

“If the loan is not done properly and is not secured and something terrible happens, then Mum-and-Dad lenders will stand ‘in the queue’ with all the other unsecured creditors hoping to get a few cents in the dollar when the house is sold to pay all the debts,” Frakes said.

He said you wanted to make sure to not sour the relationship between parents and children, so ensuring everyone got their own independent business advice was important.

“Don’t lend more money than you can afford, don’t borrow more money than you can afford – be careful because it is a risk and you need to minimise risk,” Frakes said.

“Remember, if you lend money to one child, then the other kids might come looking for a loan too.

“Don’t create family disharmony by over-committing to one child so you can’t help the others when the time comes.”


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