It was not that long ago that the % was 15%.
The average contribution is said to be nearly $90,000.
How does the need for the bank of mum and dad arise?
The need for the bank of mum and dad arises normally because banks will not lend to first home buyers, even second and later home buyers, the level of finance that they require to buy the home that they want to buy, particularly in the Sydney market.
This happens because banks have loan to valuation ratios that they will not normally go beyond in making a loan.
So this means that relative to the market value of a property that is being purchased, banks will only lend up to a certain amount (called the loan to valuation ratio).
There are also serviceability requirements that must be met before a loan will be made by the bank.
The things that need to be managed in doing a loan from the bank of mum and dad are set out below.
Unsecured loan agreement
A decision will need to be made about whether the bank of mum and dad provision:
- is a gift or a loan; and
- if it is loan, is it secured or unsecured (ie is there to be a mortgage or charge in place).
If it is unsecured, this means that if the borrower becomes insolvent, the lender has no security and has no protection for the purpose of recovering the loan.
It also means that at no time can the lender force the sale of any assets of the borrower to be able to recover the loan amount and any unpaid interest.
Do you need a registered mortgage / charge?
A registered mortgage / charge is essential if:
- you are concerned about the borrower becoming a bankrupt / insolvent; and/or
- you want a power of sale to sell the borrower’s property.
No loan forgiveness
- We do not normally make the loan forgivable on the death of the lender or the borrower.
- The reason for this is that it is very important for the lender to ensure that the wills of the lender and the terms and conditions of their estate planning and any loans to their children will allow for the intended estate planning outcome. Forgiveness can get in the way of that.
Lender’s estate planning
If the borrower is 1 of multiple siblings and the lender is / lenders are the parents of the borrower, the lender should be satisfied that in making the loan to 1 sibling, if the loan cannot be recovered, that the parents have enough other assets with which to make the gifts that they want to make to achieve the outcome that they want to achieve on their death.
So the lender’s estate planning must marry up to loans that they make to their children.
Repayment event – marriage / relationship breakdown
Most parents want to know that making an amount available to a child as a loan will be recoverable if the child’s marriage or relationship comes to an end.
So long as the parents can prove the amount was a loan and not a gift, an unsecured loan agreement is all that may be required.
That however is subject to the Family Court’s discretion not to take the loan into account in dividing the marital assets even though the loan is recognised as being enforceable. A secured loan supports the argument that it was always intended for the loan to be repaid.
Bank lending policy and loan vs gift
A potential problem with a bank of mum and dad loan and the loan is repayable “if demanded” condition is that often the loan will be made so children can buy a home. Due to the bank’s lending requirements, most banks will normally require the amount being made available by the bank of mum and dad to be a gift, not a loan, so there is a conflict that often cannot be resolved. In that case, a decision will need to be made about whether the desire to get the bank loan is greater than the risk to be protected against.
Loan lapsing – VERY IMPORTANT NOTE
- It is most important to note the problem that exists if the loan from the bank of mum and dad becomes repayable but action is not taken to recover it.
- If the loan becomes repayable but action is not taken to recover it within 6 years from the date it became repayable, the loan lapses unless the parties agree in writing before the end of that 6 years (and again at 6 yearly intervals) that it can be recovered. It is possible to make the 6 years, 12 years.
Can Long Saad Woodbridge Lawyers help you with this “bank of mum and dad” need?
Long Saad Woodbridge Lawyers’ unique position of advising on family law and advising families about the legal needs about their business and the key private client needs of property and death, positions it perfectly to assist with the legal needs that are connected to “bank of mum and dad” loans.
Long Saad Woodbridge Lawyers is able to assist you with all of the legal aspects that relate to the bank of mum and dad, which include:
- The property purchase transactions for which the bank lending will be used and the conveyancing of those property purchases
- The bank lending documentation that is attached to the bank loans for the property purchase
- The loan or gift documentation to record the bank of mum and dad contribution (normally either as a loan or a gift) that is made to help make the property purchase possible, whether or not there is also bank lending
- The provisions that should be used by the parents in their estate planning (ie will) if they have given 1 or more of their children a helping hand through the bank of mum and dad and the parents want to square up the ledger between their children when they die if they have not already squared it up
- As a result of our experience, we have also developed document packages to manage bank of mum and dad contributions (either as a loan or a gift) and the legal requirements that arise from them.
- If you need assistance with any of these things, please get in contact with us.
Disclaimer
The information in this article is general in nature and is not intended as legal advice. You should not do or fail to do anything in reliance on information in it. We do not accept any responsibility for any loss that you suffer if you do. You should seek professional advice before you do anything about the issues set out in this article.
