Withdrawal from the Bank of Mum and Dad

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 Making a Withdrawal from the Bank of Mum and Dad

Is it a Gift or a Loan?

With the Australian preoccupation with getting into the housing market and the difficulties faced especially by young, first home buyers, very often cashed-up or asset-rich parents will assist their children by ‘lending’ them money. However, such acts of generosity can lead to serious fallout if there is not a clear definition of the actual ‘loan’. Is it a gift? An early inheritance? A loan? Do the parents expect repayments? If so, on what terms and in what timely manner?

The Bank of Mum and Dad is flourishing, so I was very interested to read a news story in the New Zealand Herald with the attention-grabbing headline “We Are Not a Bank – Parents Sue Daughter”. http://www.nzherald.co.nz/personal-finance/news/article.cfm?c_id=12&objectid=11852648

Parents Sue Daughter Over Property Loan

While this particular story happened across the ditch, the events and circumstances are frequently played out here in Australia.

In the NZ case, the parents sued their daughter to recover $345,000 that they lent her to purchase a house. According to the news story, the daughter had refused to repay the loan even though she had money to spend on other ‘luxuries’ while her elderly parents continued working hard just to make ends meet.

This raises the very important issue that all types of family financial transactions need to be clearly documented, addressed in writing and clear understanding established on both sides.

Our Team has extensive experience in all aspects of Family Law and laws relating to families so we can assist you in this matter.

Setting the Terms

To avoid future problems, we strongly recommend to clients that the terms of the loan be reduced to writing and signed by the parties in a formal agreement.

This may seem quite extraordinary for some happy families and may even be received with resistance by some. However, when you consider some of the possible scenarios, the practicality and sensibility of such an action is completely justified.

A very typical scenario we come across, plays out as follows:-

  • Mum and dad lend their child money (it can be anywhere from $20,000.00 to $200,000.00) in order to help them buy a house.
  • There is nothing in writing establishing the terms of the loan e.g. the term of the loan, is interest to be charged, how it is to be repaid (fortnightly, monthly or annually), whether it has to be repaid on demand, is there any security given for the loan, etc.
  • The child goes rogue and refuses to pay the money back.
  • The child, through bad decisions, sickness, job loss or whatever loses the house and the parents’ money with it.
  • The child’s marriage breaks up and the spouse claims that the money given by the parents was in fact a gift, not a loan and therefore not liable to be repaid.
  • The parents own circumstances change whether it be through ill health, job loss or retirement such that they need the money back from their child for their own circumstances and the child refuses to repay it.

Making a bad situation even worse, parents can also act as guarantor over loans made by the children for the remainder of the home purchase, putting themselves in a liable situation if the above scenario occurs.

So when it comes to lending money to a child or another family member, don’t let your heart rule your head. Put love and affection to one side and consider sensibility and practicality. If you are lending money to your child protect yourself from unintended consequences by drawing up a specific loan agreement.

You may also like to review our resources on Conveyancing, which cover the steps of buying property including financial processes.

If you are considering lending money to a child or other family member, talk to us about preparing documentation to protect both yourself and the recipient from misunderstanding and misadventure. For more information, please contact John McLaughlin, McLaughlin & Associates Lawyers, john@mclaughlinlawyers.com.au 07 3808 7777

First Home Buyers Borrowing from Parents

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Pitfalls of First Home Buyers Borrowing from Their Parents

With property prices on a seemingly unstoppable rise and increases in income not really keeping up with the costs of living, it’s not surprising that many young first home buyers have trouble saving even the deposit for their first home purchase.

On the flip side, with interest rates at all-time lows, and very little return on their savings, it’s not surprising to see many parents, very generously, assisting their children to purchase their first home.

Whether children and parents, siblings, aunts and uncles and nieces and nephews, grandparents and grandchildren – extending a loan to a family member is an important issue and once which needs to be addressed formally to avoid potential problems for both parties.

First Home Buyers Shouldn’t Overlook the Paperwork

Buying property can be a whirlwind experience and in perhaps the idea to borrow money from parents or another family member emerges as a last resort or a last minute option.

In the rush and pressure-cooker environment of the property purchase it’s easy to overlook getting an agreement in writing with your parents or whoever you have borrowed from, regarding the loan.

It can often be embarrassing and awkward to raise the issue themselves, so parents, grandparents and other family members might just brush it off as unnecessary because you are “family after all”. However, our experience has proven that these types of transactions and the understanding around them need to be in writing signed by all parties so that everyone knows where they stand moving forward.

After all, it is a financial transaction and as with loans from financial institutions, it should be documented to cover the interests of both parties.

Clear Understanding Clears the Way Forward for First Home Buyers

Everyone, especially you the borrower, need to fully and clearly understand the nature of the loan being made to you. And that starts with a very frank and honest conversation with your parents or grandparents and follows with drawing up of a formal agreement, ideally with the assistance of a lawyer such as ourselves.

What First Home Buyers Need to Understand:

  • What is the term of the loan? When do your parents expect you to have repaid the loan
  • When is it to be repaid? Do they expect you to make monthly or weekly repayments commencing immediately or from some set date in the future
  • Is it to be repaid by way of a lump sum or is it to be repaid just like a bank loan by fortnightly or monthly repayments?
  • Is interest to be charged and if so how much, is it a fixed or variable rate? Do your calculations so you have a full appreciation of exactly how much you are borrowing and ensure it is your best option
  • If your parents’ circumstances change can they ask you to repay the loan on demand ?
  • Is security to be taken out against the loan?
  • What happens to repayment of the loan if you and your partner separate and the loan was made to one or both parties jointly?

All these aspects should be addressed in the written agreement, which should be formally drafted by a lawyer and signed by all parties.

Unforeseen Circumstances First Home Buyers May Encounter

While a loan from mum and dad may seem a good idea at the time, things change – it’s a fact of life. And you need to be prepared for the unexpected to ensure both yourself and your parents interests are both respected and met.

We have often seen cases where for example, the parents’ circumstances have changed due to ill health, loss of employment or retirement such that they require the money to be repaid. However, this was not the understanding of the child (borrower) of how the agreement was to be.

Not addressing these matters can result in a family divided in arguments over money.

Get the terms of the loan in writing so everyone knows where they stand right from the outset. Our team is highly experienced in drafting all types of agreements involving loans and property as well as in family law issues.

If you are considering borrowing money to buy your first home from your parents or another family member, talk to us about preparing the formal agreement to protect yourselves from family drama. For more information, please contact John McLaughlin, McLaughlin & Associates Lawyers, john@mclaughlinlawyers.com.au 07 3808 7777

Purchase Price Fraud: Hidden Rebates

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A Warning for Property Owners

With a large number of units and apartments about to flood the Brisbane and Gold Coast property markets, buyers, first home owners and investors are warned to be careful.

Desperate developers seem to employ any means possible to get a sale, including offering ‘rebates’ or ‘discounts’. But here’s the catch! Buyers may unwittingly become a party to fraud and find themselves in all sorts of trouble with the law and with their bank.

So with that in mind it is timely that we reproduce this article we published some time ago, warning of the dangers.

Buyers, Sellers and real estate agents beware: not fully disclosing ‘rebates’ or ‘side agreements’ could amount to fraud

Any side agreement which provides a rebate, cash-back or discount or ‘deal’ that is not written into the contract or transfer document, or where the rebate amount is hidden in a special condition, amounts to fraud against financiers, banks and lenders who lend money on the false property price.

Additionally, this fraud may have significant implications on the Land Titles Registry and the Office of State Revenue, which, with the Queensland Law Society, have imposed rules on all solicitors to prevent this fraud from occurring.

The problem is not the rebate itself, but the failure to disclose the true purchase price. Buyers, Seller and agents need to beware of the following when entering into a contract for land:

  • Reference to a ‘rebate’ or ‘discount’
  • Inconsistencies between the amount paid at settlement and the amount statedin the contract.
  • Amounts hidden in special conditions or side agreements
  • Instances where the contract also includes the sale of items such as furniture orcars at an over-inflated value.

If any of these features are present, the Queensland Law Society has instructed lawyers to assume that a fraud is taking place, unless the parties can prove that any hidden payments or rebates have been fully disclosed to the bank, Office of State Revenue or Land Titles Registry.

Fraud is, of course, a crime that can result in the Buyer, Seller and the agent facing jail time and the acting lawyers answering claims of professional misconduct

If a client refuses to disclose a hidden rebate, lawyers are required to end their retainer with their client. Solicitors may also be obliged to inform the bank, Office of State Revenue and Land Titles Registry of the fraud. Furthermore, if the bank finds out about the fraud before settlement, it may refuse the loan, leaving Buyers unable to settle and unhappy Sellers that may want to terminate the contract and sue for damages.

In addition to the risk of jail, any informal or “under the table” agreements about a hidden rebate is next to impossible to enforce and you should talk to a lawyer if such a deal is being negotiated.

Final message: make sure the rebate is referred to in the contract, and take such steps to disclose hidden rebates to your bank, Office of State Revenue and Land Titles Registry

If you have any concerns at all about the contract being presented to you for signing please contact McLaughlin & Associates Lawyers on (07) 3808 7777

John McLaughlin, Principal Director

McLaughlin & Associates, Lawyers