Borrowing From the Bank of Mum and Dad: What happens if you separate?

With the rising interest rates and high cost of living we are currently experiencing in Australia, many young couples and families are turning to their parents for financial assistance to enable them to purchase a home.  This reliance on the “bank of mum and dad” has been growing steadily over the past 5-10 years, with more and more younger Australians feeling that it is the only way they can get their foot in the door of the property market.

For many parents, the ability to help their children financially is something they have always wanted to do and the result of careful planning.  But, what happens if the child was purchasing property with a spouse or partner and they then separate?  How can the parents protect their hard-earned money and ensure it goes towards helping their child in the way they intended?

Protecting the Finances

Before providing financial assistance to their child, parents need to firstly decide on whether the financial assistance is intended to be a loan or a gift. 

If the money given is intended to be a loan, there are a couple of ways that parents can protect their interests moving forward and minimise the risk to their money if their child separates or finds themself involved in a dispute with their partner. 

1. Making a Loan Agreement

If the money is intended to be a loan, a loan agreement between the parties should be prepared.  The Agreement should preferably be written by a solicitor and clearly document the details of the loan, including:

• How much money is being loaned
• How the money will be used
• Any interest that will be applied to the loan
• The term or duration of the loan
• The repayment schedule (how it will be paid back)
• Any security over the loan such as a mortgage or Caveat on the property.

By taking a caveat on the property or a mortgage as security over the loan, and having the loan fully documented, the parents are better protected in the event that something happens in the future that puts their finance at risk, for example:

1. if a dispute arises between the child and the parents
2. if the child and/or their spouse is declared bankrupt and assets have to be sold to pay off debts
3. if the child separates from their spouse and the property becomes part of the overall  asset pool to be divided between the two parties.

The next step is to ensure that the agreement is signed by the parents, the child and the child’s spouse or partner.  This step will help to prove that the money was a loan and makes it harder for the child, or the spouse, to renege on the agreement later.

2. Preparing a Financial Agreement

Another option for helping to protect a loan, and one that can be used in conjunction with a loan agreement, is to request that the child and their partner prepare a Financial Agreement as part of the deal.

A Financial Agreement, drawn up by a family lawyer, gives couples more control over their finances in the event of a separation.  It might stipulate, for example, how the property pool will be divided if they separate and detail the couples’ wishes in terms of how to treat their finances. 

Having a solid financial agreement in place in case of separation can help to ensure that the loan is repaid to parents before the property pool is divided.

Borrowing money from family members can be an ideal way to make a start on the property ladder, renovate a home or get ahead in general.  The key is to always document the agreement accurately to ensure the money is protected from any future dispute.  Speaking to an experienced family lawyer before entering into any agreements can make all the difference - call Maclarens Lawyers today to discuss the options available to you.