Breaking into the market through the bank of mum and dad

Enter mum and dad. Many young people, whether single, in a de facto relationship or married, seek and receive a lump-sum payment from family to assist in acquiring a property. Sometimes the transaction is recorded in loan documentation or a financial agreement, other times it is made with a handshake or a kiss on the cheek.

What if something goes wrong?

Say the recipient’s romantic relationship breaks down and their soon to be ex asserts that the monies advanced were a gift and not a loan, that the loan was “on paper” only and not expected to be enforced. They say they didn’t understand what they were signing, and/or they were put under unfair pressure and signed an agreement against their will. What then?

It may be important to prove that the monies advanced were a loan and not a gift. The difference between characterising the advancement as a gift or as a repayable loan can amount to a substantial amount of money. A properly made agreement can effectively quarantine the sum from a family law claim.

The legal implications

At law, there is a presumption that monies advanced by a parent to their adult child is a gift rather than a loan. The presumption may need to be rebutted by evidence, to show that the intention of the parties that the monies advanced should be repaid.

Without a loan agreement or financial agreement, the presumption of advancement will probably not be rebutted.

How to mitigate your risk

To avoid future problems, the parties should obtain legal advice before the money is advanced. The parties – mum, dad, adult child and the child’s partner (if applicable) should formally record the proposed transaction in a document containing precise terms. In addition, a ledger should record all repayments, an unregistered instrument of mortgage and any notes from the parent to the primary mortgagor (usually a bank) notifying the bank of the loan.

To mitigate against risks of enforceability, the surrounding circumstances should show that all parties fully understood the nature of the transaction at the time that the transaction occurred. Each party should receive appropriate legal advice to guard against any future assertion of fraud, duress or other threatening behaviour.

If the transaction has already occurred, a lawyer can provide an assessment about the likely way in which the transaction will be characterised in a family law dispute.

The bottom line

If you are considering giving or receiving an inter-family advance that should be characterised as a loan and protected against a future family law claim, a lawyer can put in the safeguards to ensure the loan is protected. With the market the way it is, it’s understandable that first home buyers are looking for creative ways to keep up, but don’t skip the paperwork. A little legal advice can go a long way when you’re purchasing your first home.

Principal lawyer Brendan Herbert and special counsel Meileng Tam at Macpherson Kelley

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