- Unregulated Bank of Mum & Dad loans soar to $20 billion
- Average loan is $88k up from $30k in 2010
- Bank of Mum & Dad now a top 10 bank, with 60% of first time buyers requesting financial assistance in 2018
While regular financial institutions are making property loans harder to acquire (even rejecting applications for Afterpay, UberEats & Netflix expenses), there is one source of financing that has been willingly accepting any applicant that dares to ask, and the value of loans approved have grown rapidly. Enter, the Bank of Mum & Dad.
According to data from Digital Finance Analytics the Bank of Mum & Dad sector has grown to amass $20 billion dollars worth of completely unregulated loans.
The portfolio is so large, the parental lending sector has a portfolio larger than AMP, HSBC, Heritage Bank & Citi Group.
$20 Billion Dollars – Parents Money Unnecessarily At Risk
Jess Stimson is a solicitor at Cartland Law, a firm specialising in tax & estate planning matters, and whose clients include lawyers, accountants, advisors and businesses, and she told Real Estate News Group that parents were placing themselves under unnecessary risk by not formalising their loans to children.
“If there’s no loan documentation, regardless of who has lent the money, then it’s difficult to enforce your rights. So if there is any kind of dispute, how will you ever prove there was a loan as opposed to a gift?”
“It can also cause family disharmony, as people can become unclear about the terms of the loan. Parents might be of the understanding that the money was loaned on a standard interest rate, whereas the child might believe it was interest free or a gift.”
Stimson says there are a number of common scenarios where parents can lose the entire sum of the loan, cases in which a simple loan agreement would protect them.
“The next big problem is what happens in a divorce or breakup. If the money is given to your child who is already in or subsequently enters a marriage or domestic relationship, then that money may become part of the marital pool of assets if the marriage or relationship breaks down. This means that the spouse or partner will receive the benefit of your loan or gift.”
“Someone you think is just a boyfriend or girlfriend could end up having a claim on your parents loan.”
“Whereas a formalised loan can be called on first to be recovered before the assets are split up. The same applies to bankruptcy – you can hope to call on a loan before other creditors make claims.”
Even After Death – Loans Can Cause Issues, Contested Wills
Stimson also pointed out that issues for parents can continue from the grave, for instance when two or more children have a dispute over how the parent’s estate should be split up when moneys has been loaned to both children and terms are unclear.
“In extreme circumstances, if the parents died and one or both children were given loans, there could be a dispute between the children regarding who received ‘more’ which complicates administration of a deceased estate. A loan agreement gives an objective value of the loan and can be used to settle a dispute or even avoid one altogether, rather than a ‘he said, she said’ argument that can quickly eat away at the estate’s assets in legal fees.”
Parents Can Get “Bank-Like” Debt Security
Stimson says that in the case of large loans, in the realm of hundreds of thousands of dollars, parents should still look to securitise their loans by registering a mortgage on the title.
“By registering the mortgage, you can have the same protections as a bank so that if anything were to ever go wrong, your assets are better protected from losses.”
Not Too Late – Retrospective Loans & Mortgages
Fortunately, parents who have already given loans too their children but haven’t formalised the agreement are not doomed to be at risk forever, and can put protections in place any time after the money has been transferred.
“Loan agreements can also be done retrospectively – we can prepare and sign an acknowledgement of a loan agreement for a loan that was advanced in the past. This gives the parties an opportunity to agree on the ongoing terms of the loan, and means you can mitigate any future risks despite not setting up an arrangement correctly in the first instance.”
“We frequently prepare loan documents and mortgages for clients in circumstances where they wish to support their children or even a friend, but want peace of mind that the money won’t be lost in unfortunate circumstances. The documentation and agreements are quick, easy, and relatively low-cost matters given the size of the risks involved.”
Stimson recommends a consultation to determine what risks you face and options available in order to protect your assets and avoid potential family disharmony.
Visit www.cartlandlaw.com for a free initial consult.