With the cost of real estate rising, many children are unable to purchase a home without the assistance of their parents.
Loan or gift?
In my practice unfortunately I have come across many instances where parents having invested their superannuation to assist their child to purchase a home have been unable to satisfy the Family Court that the assistance was provided as a loan and not as a gift or in other circumstances could not prove the loan or where the child has made unfortunate financial choices other loans have been paid out ahead of the parent’s loan.
Safeguard your investment
In assisting their child, a parent must be aware of the pitfalls that may befall their investment. Unfortunately, it is very necessary when partnerships and marriages do not necessarily have the longevity of previous generations it is necessary for parents to take protective measures. In providing such financial help it is important to safeguard that investment to ensure that you are later able to recover those funds or safeguard them from your child’s partner or spouse in the event of a relationship breakdown. Without a properly drafted agreement, you well may be unable to recover your money six years after providing the funds. The Family Law Act 1975 now covers not only married couples but those couples in de facto relationships greater than two years duration. With a properly drafted agreement you are able to set out a legally binding agreement for the return of those funds. Any agreement must set out the following:
- how and when the money must be repaid;
- the interest rate; and
- the purpose for which the money is being loaned.
In most cases most parents are advancing money to enable their child to pay the deposit upon a property to obtain a loan from the bank which will be registered as a first mortgage. In such circumstances registration of a second mortgage is impractical and I recommend that a caveat be placed on the title, referring to the loan agreement between the parties or even better to an unregistered second mortgage. A caveat will protect your funds and provide your repayment after the bank has recovered its mortgage in the event of any sale of the property. Such an agreement evidences your loan in the Family Court.
As each situation is different full knowledge of the circumstances will enable the drafting of an appropriate agreement to suit your particular circumstances. I also recommend, in the event of sale, that provision be made to allow you to benefit from any capital gain that may accrue to the value of the property.
If you or anyone you know needs such assistance regarding a loan agreement, please have them contact me so that I can discuss their particular requirements with them.