The Bank of Mum and Dad:  Tips for Parents Lending Money to Children

With property prices outpacing incomes and interest rates still high, many young Australians are turning to the ‘Bank of Mum and Dad’ for help. While providing financial support can be a rewarding way to set your children up for success, without careful planning, it can also create legal risks, financial strain, and even family conflict.

How Big Is the Bank of Mum and Dad?

Parents collectively lend around $35 billion to assist their children with homeownership. However, informal lending arrangements can become complicated. If relationships break down, a child declares bankruptcy, or a parent dies without a clear loan agreement; disputes can arise.

Before lending money, it’s essential to clarify these key points:

• Is this a loan or a gift?
• Will there be repayment terms, security, or interest?
• Will the loan be legally documented for protection?

Here are six key considerations before lending or gifting money to your children.

1. Define the Arrangement Clearly

• Gift or Loan? Decide whether you are giving a gift or a loan. If your goal is to help the child avoid Lenders Mortgage Insurance (LMI), a gift may be the best option. However, if you expect repayment, a formal loan agreement is essential to protect everyone involved.
• Put It in Writing: Draft a formal, legally binding agreement stating repayment schedules, interest rates, and security terms.

2. Secure the Funds

• Legal Protection: If you’re lending a significant sum, consider securing the loan with a mortgage or caveat on the property. This provides legal backing, reduces risks and ensures you have a legal avenue to enforce repayment if they default or circumstances change.
• Avoid Informal Agreements: Verbal agreements or “handshake deals” can lead to disputes and are often unenforceable. Proper documentation ensures peace of mind for all parties.
• Insurance:
  • Ensure your child has appropriate personal insurance (e.g., Life, Total & Permanent Disability, Trauma, and Income Protection). This can reduce the likelihood that they’ll need further financial assistance from you.
  • Property insurance is essential—consider whether you should take out the policy yourself to ensure adequate coverage.

3. Be Mindful of Family Law Implications

In Australia, the median marriage age is 29.5 for men and 27.3 for women, while the median divorce age is 45.9 for men and 43 for women. Given that many parental loans span decades, ensuring legal protection is crucial to prevent financial losses in the event of a relationship breakdown

• Protect Against Separation or Divorce: Financial support or contributions may be treated as a shared asset if your child separates from their partner.
• Binding Financial Agreements: If your child or grandchild is in a relationship, encourage them to consider a financial agreement that specifies the genuine intent of the loan (i.e will the loan be repaid) and how your financial contributions will be treated during a separation. This can help prevent legal disputes and financial loss. To withstand challenges in family court, there must be a genuine intention that the loan will be repaid. If that intention does not exist from the start, the loan is likely to be disregarded during divorce proceedings.

4. Consider the Impact on Your Finances

• Don’t Overextend: Ensure your assistance won’t compromise your retirement savings, lifestyle goals, or financial stability.
• Services Australia (Centrelink/DVA) Implications: Large financial gifts could affect your eligibility for means-tested pensions or Centrelink benefits. Unless a documented loan exists, Centrelink assumes parental contributions are gifts.
• Consider the Opportunity Cost: Gifting or lending money means those funds are no longer available for investment, which could impact your long-term financial goals. The annual return for the Growth Composite Index is approximately 8% pa over the last 10 years. Can you afford to give this up?
• Consider Inflation: Money loaned today may lose value over time due to inflation. For instance, assuming a 3% inflation rate, an interest-free loan will lose about 26% of its purchasing power over 10 years and 46% over 20 years. Should you be charging interest?
• Taxation Considerations: If your child is paying you interest, that income is taxable.

5. Discuss Mortgage Repayments and Budgeting

• Start the Conversation About Finances: Speak to your loved ones about how they plan to manage the ongoing costs of homeownership. Will they live in the property or rent it out to generate income?
• Budgeting for Success: Help your children create a budget that accounts for mortgage repayments, property maintenance, and other household expenses. This ensures they’re financially prepared for the responsibilities of homeownership.
• Explore Repayment Strategies: Consider options like making extra repayments to reduce the loan term or using offset accounts to minimise interest. These strategies can help them pay off the loan faster.
• Emergency Fund Planning: Unexpected costs like rising interest rates, home repairs, or job loss can strain finances. Encourage your child to set up an emergency fund covering at least 3-6 months of expenses.

6. Review Estate Planning and Family Fairness

• Update Your Will: If you’ve provided one child with financial help, ensure your estate plans account for this to maintain fairness among siblings.
• Have Open Conversations: Communicating your intentions with family members can help prevent future misunderstandings or disputes

How Can Morrows Help?

At Morrows, we understand that whilst supporting your family is important, thinking about the financial and legal implications are just as crucial. Our Morrows team of legal, financial, insurance, and estate planning advisors can assist you in:

• Drafting legally sound loan agreements to protect your contributions.
• Reviewing your estate plan to ensure family fairness and prevent disputes.
• Assessing the impact on your financial goals, retirement savings, and pension eligibility.
• Facilitating family discussions to align expectations and minimise risks.
• Offering budgeting advice and strategies to help your loved ones manage mortgage repayments effectively.
• Review insurance needs and put in place a tailored insurance plan that balances cover objectives with affordability.

Contact your Morrow advisor to ensure your financial support benefits your children or grandchildren while safeguarding your financial future.