Helping your children buy a home – or borrowing from the ‘Bank of Mum and Dad’ – what happens if their relationship breaks down?
High home prices mean that more and more parents are helping their children pay the deposit for their first home. Last year, 55% of first home buyers received financial assistance from family. The ‘Bank of Mum and Dad’ was estimated to have provided finance of around $20 billion.
Giving our children financial assistance if we can afford it makes sense, and we all want to see our children get ahead, but there are risks you should be aware of if your child’s relationship breaks down.
An important distinction – was the money a gift or a loan?
When a divorcing or separating couple come before the Family Court for a property settlement, the Court first needs to determine the assets and liabilities of the couple.
If the money you have provided for a house deposit is regarded by the Court as a gift, then this money will form part of the assets of the separating and divorcing couple. The Court will, however, likely regard the money as a contribution made by your child and, depending on how long ago the money was gifted and what it was used for, the Court may make an adjustment in the settlement figures in your child’s favour to reflect this. However, there is no guarantee that your child would be awarded the benefit of the full amount of the money.
However, if the Court determines that the money was a loan from you to your child, from the ‘Bank of Mum and Dad’, then it would be seen as a liability. This would reduce the amount available for division between your child and their partner. Usually, your child will indemnify their partner against liability for the debt to you as part of the property settlement. The fact that they take on the debt will mean that they will receive more of the assets available for distribution.
You need to document it
If the money that you provide to your child is a loan, then you should document it with a Loan Agreement. The Loan Agreement needs to provide for things such as:
- The amount loaned
- The terms of repayment (it could state that the money is repayable in full in the event of that your child separates from their partner)
- Payment of interest
If there is no document, then you might struggle to prove that the money provided was a loan, unless there have been regular loan repayments.
I’ve already given my child money – what can I do?
If you have already provided money to your child, it is not too late to take steps to ensure that it stays in the family. You could organise for your child to repay the money that you have given to them, and then enter into a formal Loan Agreement for the same amount of money before transferring the money back to them. In the event that this is not possible, you could execute a Deed of Acknowledgement of Loan, whereby the money is acknowledged as a debt owing to you.
We can help
If you are thinking about helping your children out financially or if you are experiencing a relationship breakdown, don’t hesitate to get in touch with our Accredited Family Specialist, Alan Wright.