Protecting “Bank of Mum and Dad” Contributions to Help Children Buy Property

Common Ways To Supply Funds To Buy Property 

Arrangements that form part or all of the loan deposit, may come in the form of:

• A loan
• A monetary gift; or 
• An advance on a future inheritance

But which, if any of these options, is the best avenue if you want to ensure funds won’t be split if the relationship ends in the first couple of years?

Loan Agreements to Pay Back The Deposit

Finance Brokers don’t like having a situation where, for example, there is an amount that forms the deposit that has been loaned from “the bank of mum and dad”. Finance often won’t be approved if a loan is part of the deposit, because the lender requires that in the event of default, the bank/lender will be paid out first.

Lending websites often recommend that if parents are financially contributing to a home loan deposit, that it is better to ask parents if the funds can be provided as a gift. 

What often transpires in these situations is that there ends up being two versions in play to get the home loan approval over the line:

1. The finance application states the funds are a gift; and
2. Despite the statement on the finance application, it is known to parents and their adult children that the funds are in fact, a loan.

If the intent is for the amount to be paid back over time, a formal agreement is recommended.

However, it is important to be aware that sometimes the intention to make payments falls by the wayside. It might be that the couple have a child reducing them to only one income or some other reason that delays repayments or impacts the consistency of the repayments.

While a loan agreement can definitely be effective, for parents who wish to ensure their financial contribution will stay with their child in the event of the relationship ending in the first few years or after, the question then becomes: “Will a Bank of Mum and Dad Loan Agreement be sufficient protection from a property settlement claim?”

Gifting Funds to Contribute to A Deposit

If a parent wishes to genuinely gift funds, there must be consideration about to whom the gift is being made. Is it for the adult child only or is it for the adult child and their partner? 

If parents wish to gift funds, a ‘Gift Letter’ can be provided with the finance application. The gift letter must come from the parents and state that the funds are a genuine gift. This confirms the bank/lender’s position to be paid out first, if the need ever arises.

As we explore in more detail elsewhere on our website, when a relationship ends there can be questions about whether the gift was intended for one or both parties. Or whether the gift was in fact, a loan that was masked as a gift for the purposes of securing finance.

Without certainty about the terms under which the funds were provided, we see too often that it leads to drawn out property settlement negotiations or require the involvement of the Court to finalise. 

The Risk of Masking Loans as Gifts

For parents whose original intention was not to gift funds, this “loan as a gift” scenario means they can lose the ability to claim it as a liability to be repaid, if they ever need to. Or, certainly it is very difficult to. No parent or their adult child will want to find themselves questioned in Court bout the validity of the information provided to get the finance over the line.

Early Inheritance

Some lenders will allow an inheritance to be used as a part or full home loan deposit if there is proof that they will be able to service the loan.

In circumstances where an adult child is to receive an early inheritance to form part or all of the house deposit or purchase fund along with their partner, parents often wisely offer the advance on the condition there is a formal agreement in place to ensure the inheritance stays with their child if they were to break up in the next year or so. 

An inheritance can be included in a property split if a couple does not have a formal Binding Financial Agreement in place stating otherwise. Read on below for further insights into what the Family Law Act says about money and property when a relationship ends.

How The Court Treats Real Estate Upon Separation

In Australia, if a couple separate, whether de facto or married, there is a requirement to go through what’s known as the Property Settlement process. 

This process requires financial disclosure from both people to start negotiations and includes breakdowns of financial and non-financial contributions. Just because one person’s parents contributed funds, doesn’t automatically mean that there shouldn’t be a split of those funds. If the former couple cannot agree on who is entitled to some or all of those funds, the dispute can end up in Court.

It is worth mentioning that Property Settlements are a highly discretionary area of Family Law. The Court has the discretion to make a final decision about those funds, removing all decision making power from the former couple. However, there is a tool that can be put in place to entirely exclude the jurisdiction of the Court, and remove doubt as to what will happen to the funds provided by parents.

How to Best Protect “Bank of Mum and Dad” Financial Contributions From a Property Settlement Claim

As family lawyers who help parents navigate matters like these regularly, we learn the intention behind the financial contribution and provide insight into what the law says about how the funds could be split upon the relationship ending.

We then identify the possible avenues available to find a balance between achieving the property ownership goal and minimising the financial risk, specific to their circumstances.

To protect funds provided by gift or early inheritance, the best way forward is by having both parties enter into a Binding Financial Agreement “BFA”.

For parents who wish to loan money and protect their contribution in the early years of the relationship, the combination of a formal Loan Agreement and a Binding Financial Agreement is the best.

If these agreements are drafted properly, there is more certainty about “who gets what” upon the end of the relationship and otherwise provides an evidentiary basis for any claim.

The ‘bank of mum and dad‘ often contributes sums ranging anywhere from $200,000 to $1 million to help children enter the real estate market. As a result, accountants, financial advisors, and business lawyers are increasingly recommending specialist family lawyers to parents and their adult children are seeking advice on how to protect those funds in the event of a relationship breakdown.