First Home Buyers Borrowing from Parents

 

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