The cost of buying a property is significant.
Despite low interest rates, tighter lending guidelines and costs of living pressures mean that it can be harder to access credit and to generate a meaningful deposit.
Mum and Dad have been one of the largest “bank” in Australia in recent times. The recent Banking Code of Practice (“BCOP”) will impact how parents can support their children in purchasing a property, especially when providing security for a loan.
So if parties decide to move forward with this it is important to get the setup right, to avoid issues down the track.
Here are a few “Do’s” that we recommend:
This includes getting it signed by all relevant parties. Including a child’s partner, should they be going on title as well.
If you don’t clearly document and categorise the monies as a loan, those funds can be treated as a gift, thereby forming part of the child’s assets, and estate.
This would then expose those monies to matters potentially beyond the control of the child – whether by way of a matrimonial or de-facto separation, or if the child is self-employed, creditors, or upon a child’s demise, a claim on their estate.
In addition, the parents may need the money back one day!
It should be treated as if the parties were independent. In a perfect world, all parties to the agreement would get independent advice.
With the new BCOP requirements, banks will mandate that independent legal advice occurs. Be organised too. Guarantors must be given a minimum of three days to review documentation and to consider their obligations as a guarantor.
It can of course be waived by the parent lender at any time.
Otherwise the lender might want to charge that interest in the event there is a partner separation, such that it is an additional liability that minimises the equity available as part of the financial separation.
By way of Caveat or better yet Mortgage. Often a second Mortgage behind the child’s Mortgage with their Bank.
Be mindful that a Caveat only provides notice of the title being dealt with in some way – a refinance or sale – whereas a Mortgage provides the right to take possession of the property and sell it, should the loan agreement be seriously breached.
Mum & Dad provided money to their son without any paperwork. The son buys a property with his de-facto partner as joint proprietors. They separate later on. Mum and Dad do not have a right to put a Caveat or Mortgage on the property, or even to assert it as an unsecured loan. The son then passes away. The ex-partner becomes entitled to the entire property, with Mum and Dad’s money legally held to be a gift.
Mum & Dad provide $500,000 to their daughter to purchase a property with her de-facto partner. They have deposit of $100,000 and borrow $100,000 from their Bank. The $500,000 loan is documented in an agreement, and secured by a second Mortgage behind the Bank. Ten years later, the couple split up and look for a financial separation. The main asset is the property, now worth $1M. Mum and Dad had not charged interest for the 10 years, but have the right to, and now seek their interest – $250,000.
Deducting the loan and interest now due, the remaining equity is $250,000, requiring a payout to the ex of $125,000 (plus $50,000 of the initial deposit), as opposed to $400,000 (plus $50,000 of the initial deposit) if the $500,000 advance had been treated as a gift.
The former option may allow the child to retain the property. The latter may not.
There is always a temptation to treat these transactions in an informal way. Please resist! The happy family of today may regrettably not always be the same tomorrow.
If you require further advice in relation to the above or Property Law generally, please contact us:
p: (03) 9620 2001