The Bank of Mum and Dad - what are the risks?

Monday February 20, 2023

The Bank of Mum and Dad - what are the risks?

The Bank of Mum and Dad refers to parental funding. It’s common for parents to want to help their children get a head-start in life, if possible, by advancing money for them to buy their first home. This article examines the risks to the parents from a property law and a family law perspective.

In property law

Before parents lend money to their children, it is important for parents to be clear on whether it is a one-time monetary gift or a loan. Without a legal document, it is defaulted to a monetary gift and treated as such. With a legal document such as loan agreement in place, both parents and children will be protected against the risk of something unplanned occurring or the severity of potential disputes, such as a business failure, relationship breakdown or death.

Presumption of advancement

When a parent advances money or transfers property to a child Courts will presume that it is a gift, unless it can be proven otherwise – this is called the presumption of advancement. Where the presumption is not rebutted and the Court finds it was a gift, the parents do not have a legal claim for repayment of the money (or for the return of or payment for the property).

Where disputes arise, it is usually the parent or the parents’ executor who will have to prove that the amounts advanced to the child were a loan and not a gift. The best evidence to prove that parents were not making a gift to their children, and rebut the presumption of advancement, is a properly drafted deed or agreement, signed at the time of the advance of money (or transfer of property) documenting that the parents’ intention is that the money is repayable (or that they maintain an equitable interest in the property).

A loan agreement should be written and executed by all parties with the following details included:

  • amount of money being loaned
  • interest, if any, applied to the loan
  • term or duration of the loan
  • repayment schedule and if there is security over the loan such as a mortgage or caveat on the property
  • what happens to the money if any of the parties involved dies.

The loan itself should be supported by a first mortgage, second mortgage or at the very least a caveat. Having a mortgage to support the loan is better in most cases. This would lead to the interest of that loan being recorded and brought to the attention of any subsequent creditors and other parties interested in the security of the property. It will also better protect everyone if an unexpected event were to occur that puts the finance at risk, such as a dispute involving a spouse or creditor. If the loan agreement is not secured, in the event of bankruptcy you will be just another unsecured creditor and may never be repaid.

In family law

When a child separates from their spouse and they start negotiating a division of the property of their marriage or relationship, the first question often asked about the money advanced by one spouse’s parents is whether it is a gift or a loan. The answer is important because if it is a loan, it reduces the amount that the child’s spouse will receive in settlement of all claims under the Family Law Act.

If it’s a gift

If it’s a gift the child and their spouse have no obligation to repay the parents. The equity in the property (or other asset), that the money was used to purchase, is subject to the Family Law Act claim of the child’s spouse.

The Court will generally assume that the gift was intended to benefit only the parents’ child and in those circumstances, it is assessed as a contribution made on behalf of the parents’ child (and not both parties to the marriage or relationship).

If the Court assesses that the parents’ child has made a greater contribution to the acquisition, maintenance and improvement of the property of the marriage or relationship, they may receive a greater share of it than their spouse – subject to any disparity between each of their future needs. However, this assessment also includes contributions to the welfare of the family such as homemaking and child-rearing and in longer marriage; the weight attached to the contribution on their behalf by their parents may be far less than what their parents initially advanced.

If it’s a loan

If it’s a loan (which is enforceable), the child and their spouse will be expected to make repayment from the other property of their marriage – such as their savings or, if the property is sold, from the proceeds of sale. In these circumstances, the parents are repaid what they advanced (or how much of that has not been repaid historically) and less remains for their child’s spouse to make a claim against under the Family Law Act.

If there’s a dispute as to whether it’s a gift or a loan?

The Court will first determine whether it was intended to be a loan and will consider the following:

  • existence of any written loan agreement
  • terms of repayment (when it should be repaid and whether interest is payable)
  • whether any loan repayments were made by the parties
  • evidence of any discussion between the parties as to the existence and terms of the loan
  • whether there was an expectation of repayment
  • whether there was any security provided for the loan, such as a registered mortgage
  • whether the parties and/or parents said anything to third parties (such as banks or Centrelink) about the character of the advance.

If the Court considers the money advanced to be a loan, they will then determine whether it is a liability of the marriage or relationship. If they ‘treat’ it as a loan, they will then consider whether the loan is likely to be enforced or not.

We can help you

If you are considering lending money to your children or borrowing money from your parents to purchase a home, it is important to not only seek the right advice, but to also get the best agreements to suit your circumstances.

At HOCW Lawyers, we consider the best ways to protect both parents and children from any financial issues occurring. If you would like to discuss a family law matter, a property law matter and/or a new or existing loan arrangement, please contact us on 03 9629 7411.

This article was co-authored by Andrew O'Sullivan-Newbold, Associate and LIV Accredited Specialist in Family Law and Kim Nguyen, Property Lawyer.