Lending a helping hand to your children to buy a home is one of the greatest gifts a parent can give, but the strings attached – financial, legal and family – are often complex.
Since March 2020 there has been an increase in ‘the bank of mum and dad’ (BOMD) assisted purchases. The average amount advanced according to Digital Finance Analytics is $89,637.
It’s difficult to pin down what is driving this increase. Perhaps it’s FOMO in a rising market?
Whatever are the drivers, Pacific Law’s David Netherton has some simple advice for any parent looking to dip into their savings to help a child.
“Start by determining the impact of the gift or loan on both the parent and child,” he says. “Secondly, talk to the other family members, particularly other children, so that everyone understands why you are doing it and how it’s going to work.”
BOMD can either be a monetary gift or loan to a child. “Both have ramifications for parents and children,” Mr Netherton says.
A gift may result in the parent being deemed to own part of the property being acquired. Similarly, a loan repayable to the parent in the future may be deemed to have an interest rate applied giving the parent an income. Both these might ultimately impact on a parent’s pension or financial position.
Loans that require the money to be repaid in the future are usually preferred by parents as they help protect the funds from a child who separates from a partner or becomes bankrupt.
However, banks often require the BOMD contribution to be a gift. Parents who declare the funds to be a gift to the bank, but want the funds repaid, should be wary of what conflict might happen in the future if there is a hostile family environment.
“Thinking ahead is also important,” Mr Netherton says. “For example, if a loan is to be forgiven on the death of the parent, this needs to be included into the parents will.
“Also, if the child receiving the benefit of the loan becomes the power of attorney for the parent, this conflict of interest needs to be carefully managed, particularly if other children are involved.”
In closing Mr Netherton says his best advice is for parents and children to get independent legal and financial advice so they are aware of all the impacts. “Secondly, ensure everything is in writing,” he adds.