The risks of borrowing from the bank of mum and dad

With the Australian dream of owning a home becoming increasingly out of reach for young Australians, the bank of mum and dad is an option many turn to. It's not just for buying property, with families frequently lending money to help with everyday expenses amid the cost-of-living crisis. But youth sociologist and senior lecturer at the University of Newcastle Julia Cook says there are legal risks when borrowing from family, and the taboo of talking about money is at the heart of many. Firstly, what is the bank of mum and dad? In short, it's a term for the financial support that parents give to their adult children. It's estimated to be worth about $35 billion and the Productivity Commission says if it was an actual bank, it would be somewhere between the fifth and ninth biggest mortgage lender. Dr Cook and her team spoke with 80 older parents and adult children as part of new research into the bank of mum and dad. Most were from Gadigal Country/Sydney and had either given or received family money to help with buying a home. Participants of the study had provided or received an average of $75,000, although amounts were as small as $5,000 and in one case, $500,000. Dr Cook says while the cohort was mainly middle and upper class, there were parents who weren't "well-to-do" giving whatever they could to help their child get into the property market. "One father was living in social housing and was a full-time carer for his wife. He had saved money for years to give to his daughter." "A single older lady didn't own property and was living rent-free in a friend's house. She was 70 and working part-time as a teacher still. "She was giving all the money she could afford to her son to help with his mortgage." The taboo of talking about money Parents and adult children interviewed for the study said they were often unclear whether the money was a gift or loan, says Dr Cook. Most of the time, they reported not having even written anything down about the money. "I would go and speak to someone, then go and speak to their mum. That's how it became apparent … they had very different understandings of the money," Dr Cook says. She says the financial arrangement could be "fuzzy" because the status of the money changed over time. For example, it might have started off as a loan, but once the adult child had kids or experienced financial difficulty, the parents effectively wrote it off as a gift. "There was rarely an explicit conversation," Dr Cook says. Relationships NSW CEO Elizabeth Shaw says money remains a difficult subject for people to talk about. "With money, there can be the fear of triggering shame," she says. Given a parent might want to protect their child from "feeling bad" for needing a loan, the terms of it can remain undiscussed, she adds. "It can result in a loan that comes with all sorts of unspoken ties that can come back to bite people." The risks of a family loan There are many risks that come with this financial arrangement, especially when the terms aren't clear, says Dr Cook. Even if the money is intended to be a loan, the family might not take steps to protect that with documentation. "The most people would do is send an email, setting up the terms, or writing on a piece of paper and asking kid to sign it. "But basically no-one sought professional or legal advice." And because many banks require written proof that funds from the bank of mum and dad are genuinely a gift, Dr Cook says some participants in her study were asked to sign gift letters for their children, even when they viewed the money as a loan. "These are important family relationships, and it can put them under strain and also create tension with siblings," Dr Cook says. She says the financial risk can be great for the parent lending money and "leaves the door open for abuse and coercion". "In some cases, older adults feel very obliged or pressured to step in and help." Dr Cook says the other big risk is when a parent is lending or gifting money to a couple, rather than just their child. "If that couple parts ways, it's really difficult to try and substantiate 'that gift was just to my daughter.'" Gabriella Pomare is a family lawyer in Gadigal Country/Sydney and says these loans often operate on trust. "Nobody is thinking about lawyers or loan agreements because the relationship is good and everybody trusts one another. "The problem is that family lawyers usually become involved after something has changed — a separation, a falling-out, a death, financial difficulties. "Courts and lawyers eventually have to operate on evidence." Ms Pomare says a parent may forget to secure their own future while being focused on helping their child. "I've seen parents provide substantial sums at a point in their lives when they're approaching retirement. "If circumstances change and they need that money back, they may discover there is no clear repayment mechanism." Protecting everyone involved Ms Shaw says many people spend more time focusing on the benefits than discussing the risks. "It is worth discussing up front the potential impact on the relationship. "Where might merging money and relationships be a problem and where does it make sense — and does it feel right for both parties, or only one? Where might a separation of commercial interests be better for longstanding family dynamics? "Discuss unforeseen circumstances, such as defaulting on the loan, and how to manage that." She says families should also consider what other stakeholders, such as siblings, need to be across the agreement. While privacy is important, secrecy can be dangerous. Ms Pomare says clear documentation can protect the relationship. "Have the uncomfortable conversation at the beginning rather than the expensive argument at the end. "If it is genuinely a gift, document that it is a gift. If it is genuinely a loan, treat it like a loan." She recommends a properly prepared agreement recording things such as: How much is being lent Who exactly is borrowing it Whether interest is payable When repayment is required Whether repayments are regular or only triggered by something like the sale of the property What happens if the borrower separates from their partner What happens if somebody dies Whether the loan is secured; and Whether the arrangement needs to be considered as part of the parents' broader estate planning. "Where significant money is involved, I'd also strongly encourage independent legal advice, particularly where the child is purchasing property with a spouse or partner," Ms Pomare says. Ms Shaw says sometimes the best move is not to lend an adult child money, but instead help them get good financial advice and build financial skills. "There are financial options, and family need not always be one of them." This article contains general information only. You should consider obtaining independent professional legal advice in relation to your particular circumstances. ABC