In recent years, there has been a notable surge in what has been dubbed as the ‘Bank of Mum and Dad’ transactions. This term reflects the increasing trend of parents financially assisting their adult children, particularly when it comes to property purchases. While this familial support can offer numerous advantages, it also comes with its share of risks and potential pitfalls. At Whyte, Just and Moore, we understand the nuances of both Property Law and Estate Planning, and the increasing trend of turning to family for financial support.
Let’s delve into why these transactions are on the rise, explore the benefits they can bring, highlight where things can go wrong and provide our practical tips for minimising risks in these ‘Bank of Mum and Dad’ property transactions.
Why the Surge in ‘Bank of Mum and Dad’ Property Transactions?
This phenomenon has gained traction due to several factors in today’s economic landscape. One significant reason is the challenging housing market, especially in areas like Melbourne and Geelong where property prices have soared beyond the reach of many first-home buyers.
Young adults facing steep property prices and strict lending criteria often turn to their parents for financial support. Parents, in turn, are often willing to provide financial support, whether through gifting (or loaning) funds towards a house deposit or acting as a guarantor on a home loan. In some cases, parents may purchase a property jointly with their children, creating a shared investment that can yield returns for both parties.
Benefits of Family Assistance in Property Transactions
- Accelerated Homeownership
The most visible benefit is it can help younger generations enter the property market sooner than they would on their own, allowing them to benefit from potential increases in property values over time. This early entry into property ownership can also provide a sense of stability and security. - Better Borrowing Power
Family assistance in property transactions can enable buyers to avoid costly lenders mortgage insurance (LMI) and secure more favourable loan terms.
- Estate Planning Considerations
Parents may view property assistance as a strategic component of their estate planning. By helping their children enter the property market, parents can not only support their child’s financial stability but also lay the groundwork for a well-thought-out estate plan that minimizes potential tax implications.
Where Things Can Go Wrong
- Strain on Relationships
Financial transactions between family members can sometimes strain relationships, especially if expectations or repayment terms are not clearly communicated. Verbal agreements or assumptions about repayment terms can lead to misunderstandings and resentment. It’s crucial to have open and honest discussions about expectations and put everything in writing to ensure clarity and reduce the chance of misunderstandings.
- Risk of Default
If the borrower faces financial challenges, the guarantor (typically the parent) may be at risk of having to cover the repayments, potentially impacting their own financial stability. Before agreeing to be a guarantor, parents should carefully consider the risks involved and their ability to cover the repayments if the borrower defaults.
- Legal Implications
Without proper legal documentation, misunderstandings or disputes may arise, leading to legal complications. Resolving disputes or clarifying the terms of the transaction through legal means can be costly and time-consuming.
Minimising Risks: Tips for a Smooth ‘Bank of Mum and Dad’ Transaction
Clear Communication
Establish open and honest communication regarding expectations, terms, and the potential risks involved. No one should be signing a dotted line until everyone is absolutely on the same page!
Legal Documentation
While it may seem excessive for a family transaction, engaging a lawyer to oversee the process can prevent a great deal of heartache down the road. Seek professional legal advice to draft a formal agreement outlining the terms of the transaction, repayment conditions, and the role of each party, and what happens in case of default or unforeseen circumstances. Having a legally binding document protects everyone’s interests and helps prevent misunderstandings or disputes.
Consider Independent Financial Advice
Both parties should also consider seeking independent financial advice to understand the potential implications and ensure the arrangement aligns with their overall financial goals. An impartial financial advisor can provide insights into the potential implications of the transaction and ensure it aligns with the overall financial goals of everyone involved. They can offer guidance on the impact of the transaction on both parties’ financial situations, potential tax implications, and long-term financial planning.
Contact Geelong’s Trusted Legal Team
Navigating ‘Bank of Mum and Dad’ a property transaction requires careful consideration, clear communication, and legal expertise. At WJM, we specialise in Property Law, Estate Planning, and Dispute Resolution, providing tailored advice to meet your unique needs. If you are contemplating financial assistance or have questions about property-related transactions within the family, our experienced team is here to guide you.
Contact us today for expert advice and personalised solutions to safeguard both your family relationships and financial well-being. Your property journey begins with the right guidance.
