Bank of Mum and Dad

As property prices increase in an uncertain market, new homeowners have found it more difficult to obtain finance from a bank. This has given rise to the growing popularity of the “Bank of Mum and Dad” where parents lend money to their children to assist with their purchase of a property.

The children can benefit in obtaining a loan from the Bank of Mum and Dad:

• Mortgage insurance may be avoided as a larger down payment is being made.
• Better terms can be negotiated with a retail lender, including lower repayments with lower interest rates.
• It opens the market that the children can buy into as they have more funds available to them.

There are also some pitfalls in obtaining the loan from the Bank of Mum and Dad:

• Retail lenders may treat the loan as a liability and reduce the amount offered to the children.
• Recovery of the amount advanced may be difficult if the children separate from their partners where the loan is not properly secured.

Parents need to consider their own personal circumstances before agreeing to lend their children money. For example:

• How much can the parent afford to lend to their children.
• How this may impact the parent if their heath or financial circumstances change.
• Whether other children will expect the same support.
• It may also affect the parent’s own capacity to borrow in the future.

Although the transaction is between family, this should not stop the parties from recording the agreement in writing to ensure each party understands the nature of the arrangement. Additionally, it is particularly important to ensure the loan is secured. This allows the parents to enforce the loan to require repayment of the loan if the necessity should arise.

We can advise how best to structure the arrangement between the children and parents and assist with the loan agreement and security documents in time for the settlement of the property by the children.

If you are considering lending money to your children to help them purchase a home, please contact us before you handover any moneys to discuss how we can assist with the transaction and to prepare documents to protect the parents whilst assisting their children.