The Australian Dream is becoming less affordable, and for some, out of reach. The primary pressure is saving the deposit, which is closely followed by how the mortgage will be serviced. Except for 1980 in Sydney, and 2010 in Melbourne, now is the most difficult time in Australian history to save for a deposit and then pay the mortgage[1]. It’s little wonder, adult kids are looking to the ‘Bank of Mum and Dad’ for help.
In this article, I explore what parents, including high earning mining and resources executives and business owners, need to consider before lending money to their offspring.
House prices are rising and people in their 20s, 30s and even 40s are having difficulty buying a house particularly if they are entering the market for the first time. Many of them are turning to their parents to help them obtain their piece of the Australian Dream.
This is happening so frequently, that the Bank of Mum and Dad is now Australia’s ninth largest lender [2] handing over to their children on average $134,200 for it to be used towards a property purchase[3].
Unlike a bank, mum and dad motives are usually not self-interested and commercial, however, like all banks, mums and dads need to consider the many legal, accounting and taxation issues that can arise when they lend money to their children.
At risk of stating the obvious, I’d like to point out it’s important for advice to be sought BEFORE any consideration and decisions around lending to children are made, the money is handed over, or the property has been purchased[1].
Importantly, any decision that is made must be documented and this is to make clear the terms and obligations for the purpose of avoiding what can be very serious consequences for everyone.
There is often considerable ‘emotional’ as well as financial pressure placed on parents, who find themselves in this situation. But the emotions need to be put to one side while the practical and indeed legal ramifications of any lending arrangement is considered.
For high earners in mining and resources, there can be a perception of being able to afford to finance your offspring. However, your own lifestyle expenses now and those in the future when you decide to wind-back may depend on drawing on the very cash reserves you are considering on giving away or lending to your children. Fact-checking your own financial position is a key first consideration.
Then there are important questions all parents need to be ask, and if you’re not asking them, your lawyer, accountant and financial adviser certainly will!
A baker’s dozen
There are thirteen questions that instantly come to my mind for parents who are considering lending to their adult children. The answers will differ depending on the circumstances. Hence, the need for advice. Suffice to say, these questions will get you thinking about the commitment and magnitude of your decision.
- How will you provide the money – as a gift, a loan or is it a partnership?
- How much money is to be lent?
- Will the money be used for a deposit, payments towards the mortgage, payment of expenses or a combination?
- Who is the recipient of the money?
- Will interest be charged on the loan amount?
- Is there a timeframe for the arrangement?
- How will the property be held?
- Will you have a registered interest in the property purchased by your child?
- How will the money lent be secured?
- Will you act as guarantee for your adult child?
- Are you using your own retirement savings, superannuation or even your own home to fund the lending?
- During ownership who will pay the mortgage and the expenses of the property?
- How does the lending arrangement to your kids, affect your financial and taxation situation?
Then of course, there are the ‘what happens if’ scenarios.
Lending money for the purpose of purchasing a home is a long-term arrangement. Banks are in it for 30 years, and the same applies for mum and dads (maybe even longer). It’s extremely important to look to the long-term future and whether the lending arrangements you make are sustainable.
So, let’s consider what happens if…
Your child gets divorced or separated, what happens in a property settlement?
Your own relationship breaks down or the relationship you have with your child breaks down?
If the child wants, or needs, to sell the property or conversely, you want or need to sell it?
The child can’t repay the mortgage or pay the property expenses?
And heaven forbid, what happens if someone in the arrangement dies or goes bankrupt?
These questions (and others) need to be asked, and not just answered, but fully understood so there are no surprises in terms of the ramifications and obligations of any lending arrangement should things change.
The past, present and future personal, financial and taxation circumstances of all involved needs to be taken into account. Shoring up arrangements, so that everyone’s best interests are served, will to a large extent depend on the combined advice of all your advisers – legal, tax and financial.
Next steps:
Unless it’s a gift, consider any money offered to your adult children, particularly for large purchases such as property, as a business transaction.
Review the questions raised here, and if you don’t know or if the answer is ambiguous, you need advice. As explained here, that advice will rarely be from a single source as the entire situation will need to consider both parties’ legal, financial and tax position.
Importantly, get advice from your lawyer, accountant and financial adviser BEFORE making any commitments. In my experience, working in multi-disciplined advice-teams, better and properly integrated solutions are usually achieved that cover everyone involved.
Deal in facts. Ensure arrangements are documented. Believe me, handshake deals with even the best-intentioned family members, very often end in tears!
For guidance and advice about lending to family members, please contact Robert Lamb on +61 (0) 7 3007 2000 or email contact@resourcesunearthed.com.au
Resources Unearthed is a solutions hub that provides integrated financial, legal, property, accounting and business advisory services for executives, professionals and business owners in the mining and resources sectors.
The information in this article is intended only to provide a general overview and has not been prepared with a view to any particular situation or set of circumstances. It is not intended to be comprehensive nor does it constitute legal advice. While we attempt to ensure the information is current and accurate, we do not guarantee its currency and accuracy. You should seek legal or other professional advice before acting or relying on any of the information in this blog as it may not be appropriate for your individual circumstances.
References:
[1] Is Australian Housing Unaffordable? Drummond Capital Partners, 30 September 2021 https://www.drummondcp.com/insights/is-australian-housing-unaffordable (Accessed: 17 November 2021)
[2] Hughes. D. (2021) Bank of Mum and Dad becomes top 10 mortgage lender, Australian Financial Review, 19 March 2021. Available at: https://www.afr.com/companies/financial-services/bank-of-mum-and-dad-contributions-hit-34b-20210317-p57bkz (Accessed: 17 November 2021).
[3] Gee, O (2021) Bank of Mum and Dad report 2021: Property boom puts parents under pressure Mozo. 14 October 2021 https://mozo.com.au/home-loans/articles/bank-of-mum-and-dad-report-2021 (Accessed 17 November 2021)
