A guide to parent to child property loans

Even though residential property prices have come down a little recently, housing affordability is still a major obstacle for young people looking to enter the property market.  Increasingly, the bank of mum and dad is stepping in and providing financial assistance to their children in order to help them climb the property ladder.  This gives rise to a number of issues.  What happens if they default on the bank mortgage?  What happens if there is a marital breakdown?  What happens if my child dies or is made bankrupt?  There are a large number of issues to consider as well as a few traps to be avoided.

Gifts

First, consider whether the financial assistance will be a loan or a gift.  If it is a gift, you need to think about the ways in which it might be lost.  For example, if your gift is used to buy a property by your child and their spouse as joint proprietors, and your child dies, their spouse will be entitled to ownership of the whole property, irrespective of anything it might say in your child’s will.  Equally, if your child becomes bankrupt, the trustee in bankruptcy will help themselves to your child’s interest in the property that was bought with your gift.  Is it your intention that your gift should be exposed to your child’s creditors in this way?

Many parents making a gift to their child for the purpose of acquiring a property may be fearful of a marital breakdown and the potential for the equity in the property being diverted away from your child and given to their ex-spouse.  This is what Tom Clancy would call a “Clear and Present Danger” and is something that you will need to consider.

Finally, if you are entitled to a pension, care must be taken that the gift does not affect your pension entitlements.  It is a good idea to check with Centrelink before committing yourself to give such a gift.

Loans

In light of the risks set out above, you may consider it prudent to characterise your financial assistance as a loan.  Even if you ultimately have no intention of having the loan repaid to you, you can prevent these funds being available to anyone other than your child, provided you take the right steps.

The first mistake made by many parents is a failure to document the loan.  Of course, you trust your child to repay the loan but there may be a number of circumstances where the person you will ultimately have to deal with is not your child but someone who is much more adversarial to your interests.  It might be a trustee in bankruptcy, a statutory authority or your child’s spouse’s divorce lawyer.  At that point, the only thing that can be guaranteed is that, even if you and your child swear that there was a loan, you probably won’t be believed.

It is also prudent to secure the loan by registering a  mortgage over the property.  By doing this, you will ensure that the property cannot be transferred without your interests being addressed.  Other interests in the property can be claimed by third parties but, generally speaking, any interest that is registered or arises after your mortgage will be subordinate to your interest.

In many instances, your loan will be made in order to enable your child to qualify for a mortgage loan from a bank.  The Bank will insist that their mortgage is listed first and therefore,  the best security you will be able to take is a second mortgage.  If you intend to take a second mortgage (and we highly recommend that you do), the first obstacle that you may encounter is that the bank will try to pressure you into converting your financial assistance from a secured loan to an unsecured gift.  Banks think that this improves their security position as first mortgagees.  They’re wrong about that, but it doesn’t stop banks asking you to sign a statutory declaration to the effect that your financial accommodation is a gift.  Our advice is to push back hard against any bank which tries this, but often the issue is left unaddressed until it is too late to do anything about it.  Make sure that this issue is raised with the bank at the start of the borrowing process and that they agree in writing to you taking a second mortgage. 

It is critical that you ensure you have sufficient time before settlement to enable you find a more accommodating bank should the original lender baulk at the idea of you protecting your interest by registering a second mortgagee.  If this issue is raised a couple of days before settlement, it is almost certain that the bank will require you to contribute your funds as a gift.  In practice, you will have no choice but to comply because the alternative will be for your child to either lose the property all together or incur costly penalties or both for breaching the contract of sale.

If you need assistance in finding a more accommodating bank, please do not hesitate to seek expert assistance from James Thompson, Head of Lending at Partners Lending on 0437 940 065. Alternatively, you can contact Partners Legal Solutions for a referral.

One further mistake we often see is that parents advance the money before the documents are signed.  This will expose you to the risk of losing your security under the laws relating to insolvency, so please wait until the documents are signed before handing over the money.

Jointly Owned Properties

There are some additional issues that arise in relation to jointly owned properties.  If the loan is to be made to your child and their spouse, then they should both sign the loan agreement and the mortgage documents.  Taking a mortgage over part or half of a property can be difficult to register and practically impossible to enforce.

This will also enable your loan and security to continue if your child should die and the ownership of the whole of the property passes to their spouse.

Final Thoughts

Here are a few final thoughts for you to consider in relation to this topic. 

Ask yourself, “What do I want to happen to the loan in the event of my death?”  If you don’t want the loan to continue, you may need to change your will to reflect this.  As with everything that involves a generational transfer of wealth, it’s a good idea to get sound advice to ensure that what you want to occur actually will occur in practice.

At Partners Legal Solutions,  we are uniquely placed to advise on all matters relating to gifts or loans to children for the purchase of property, whether it be securing finance from the right lender, or putting in place the right documents to protect the interests of you and your family.

For comprehensive advice in relation to these matters, please contact Patrick Robertson, Head of our Wealth practice at Partners Legal Solutions on 0468 993 337.

This information is general in nature and is provided by Partners Wealth Group. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.