Approximately 40% of 25 to 34 year olds contemplate seeking parental support for home purchases.
There are many ways parents can help their kids jump into the property market:
- Cash gift
- Personal loan
- Guarantor
- Purchase together
While it seems exciting and generous at the onset, a change of circumstances is inevitable and should be considered BEFORE you make your generous offer.
To avoid future potential disputes, parents should establish clear terms on whether helping financially is a gift or a loan AND have an exit strategy documented.
Different recollections of ‘Bank of Mum and Dad’ loan discussions, quarrels within blended families about who owns what, children’s inheritance impatience
and the rights of adult children living at home are increasingly being settled in court.
In the world of property transactions and current family dynamics, a lack of clear agreements can lead to costly legal battles and strained relationships.
Families dealing with the purchase, transfer or ownership of real estate need to be mindful that family relationships and needs are constantly changing.
Failure to plan for this could have catastrophic financial consequences for you or your loved ones.
Lawyers tell us that the following situations cause the most stress and advise how to avoid problems in advance.
BANK OF MUM AND DAD
Parents considering providing help need to be very clear on whether they are providing a gift or a loan to their children.
Parents providing a gift do not expect to be repaid or have any interest in their children’s property.
Loan agreements need to be documented and should detail:
- the size of the loan
- the term
- how it will be repaid
- interest payable, and
- whether it is registered against the title as a mortgage or secured by the parents’ property.
Ownership
Deciding whether the parents are part owners of the property as joint tenants or tenants in common is imperative.
The agreement should also specify the lenders’ rights on default.
A second mortgage on the child’s property title might create problems if the parents want to sell the family home.
Specify whether any loan guarantees are partial or full.
A partial guarantee, of say 30% of a loan, reduces exposure and limits risk to the parents.
Formulate an exit strategy and regularly review arrangements.
For example, a child might be able to accelerate repayments after a few years in the workforce when they are earning more money.
Verbal agreements are not enough.
Many family disputes regarding real estate are caused by a reliance on conversations where members walk away with conflicting beliefs about what was agreed.
It only takes one element, such as a family death or divorce, to throw a verbal agreement into uncertainty.
These disputes often come to the fore many years later, so the fallibility of memory often compounds the issue.
To avoid problems, discussions need to take place where parties listen to each other’s plans and treat each other fairly and respectfully.
Before signing an agreement, workshop what might happen if circumstances change over coming decades. For example, what would be the impact of one party wanting to sell or develop the property or if one of the parties decides to marry?
You need to think through the ramifications by stress testing any agreement.
When you have an understanding, see a lawyer.
To avoid ambiguity, it should be legally documented and signed by all involved.
The cost of doing so now will be significantly less than the emotional and financial cost of a family dispute down the track.