The Bank of Mum and Dad
How to help adult children buy into the property market has become the most frequently asked question that I am asked as a financial planner so I thought it would be timely to outline what I believe are three biggest traps.
1. Is it a loan or a gift?
The starting point for wanting to help your children is always a place of love. We all understand just how difficult it is for young adults to break into the property market and most older Australians appreciate how much security owning your own home can bring into your life.
Because the starting point is from a place of love it is easy to act first and pass funds across and just hope for the best. That it will al work out. I am sure there are many cases where it does but there will be just as many where it doesn’t.
And where it doesn’t the ramifications can be disastrous. Nothing can pull a family apart with more acrimony or devastation then money issues, so it is really, really important that you think through what you are doing before any money is committed either physically or verbally.
And the first decision you need to make is to decide whether you are passing funds across as a loan as thought of as a gift.
2. It should always be a gift
Ironically, I am a firm believer that if you do give money to a child for any purpose, it should be done as a gift. That you might speak about it being a loan but in your heart of hearts it should always be a gift.
If you think of it as a loan, it is so easy for things to go wrong despite everyone starting out with the best intentions. No one can see the future or what missteps or successes might lie in store for our children.
If you think of it as a gift, it will stop you from giving away money that you can’t afford to give away and it will stop the situation blowing up in the future to a point where members of your family stop speaking to each other and that sadly can be the end result when things go wrong.
Nothing is worth that.
3. If it’s a loan, it needs to be in writing, or you need to have your name on the title.
If you do decide that you will only extend funds to a child as a loan, then you need to be quite clear about it and have it in writing and signed and dated by everyone involved. Ideally it should be witnessed by your solicitor and if you want the document to have any teeth down the track, it needs to be registered and have stamp duty paid on it.
Alternatively, there are some very good banks who offer loan agreements specifically catering for this situation and if you take up this option it will mean your name will be on the title of the property as well as any loan documents.
These last two steps may seem like overkill but I know of many families that have been destroyed by what started as a loving thought and who deeply regret not choosing one of these last two options.