Navigating the bank of mum and dad

When Tyler Smith was trying to buy his first home, the milestone purchase was only possible due to help from his parents. “We got support from both sides of the family to help us with the deposit,” he explains. “My parents chipped in some cash and my wife’s family also contributed a considerable sum, which was seen as early inheritance.”

Tyler’s example isn’t unusual. For first home buyers in Australia, calling on “the bank of Mum and Dad” is becoming more common and increasingly necessary. As house prices continue to climb, it’s harder than ever for younger buyers to get that first toehold on the property ladder. Higher prices, after all, mean bigger deposits are required.

“Getting that extra deposit from family allowed us to stay in the neighbourhood that we were in, which was near family,” says Tyler. “It enabled us to get a slightly bigger house without overextending ourselves.”

If you’re in a position to help your children buy their first property, then it may seem like a no-brainer. Practically everyone wants their kids enjoy financial wellbeing—it’s an important component to overall wellbeing, as the Australian Unity Wellbeing Index shows—and home ownership can be great way to build equity on a long-term investment. Yet the decision to offer financial assistance to your kids is, in fact, surprisingly complex and rife with hidden dangers.

Are you really in a position to lend?

Before you reach into your pockets, you need to scrutinise your own financial situation, insists Mark Brennan, Head of Service with Australian Unity Bank.

“If you want to help your children enter the housing market, you need to be comfortable with what you can afford to loan them,” he says. “How old are you? What are your retirement plans? These next-stage-of-life questions are important so you can support yourself and your children into the future.”

As the housing market continues to accelerate at breakneck pace, you may feel obliged to make a substantial contribution to help them in a meaningful way. But you need to be careful not to get carried away.

“I recommend an amount of money that you won’t need back immediately,” says Mark. “If you offer an amount that impacts on your lifestyle and things go down an unforeseen path, then you may not get that money back easily or quickly.”

Check the financial implications

Before lending any money, it may also be worth speaking to your accountant to make sure you’re aware of the broader financial repercussions.

For example, if you’ve arranged a proper mortgage with your kids then it's considered an income, so you may have an income tax liability from trying to help your kids out.

Likewise, with current economic uncertainty and ongoing warnings of rising interest rates and recessions are you sure that you won’t need the money back should you encounter financial difficulty? And what happens if your children cannot afford the loan?

These are questions that should be considered and planned for.

Make everything transparent

Unfortunately, if handled incorrectly, a loving act of generosity can quickly turn sour.

In many cases a lack of transparency can lead to a myriad of issues. This can open up a host of misunderstandings between you and the kids you’re lending to—not to mention other family members.

“I know there was an ongoing tension between my wife and her sister,” Tyler adds. “It was a private arrangement, so nobody other than us knew how much was given. And this added tension, because there was a demand that what was offered to one sibling, should have been offered to the other.”

With anything to do with families and money, it is recommended to be really clear about what's going on with each other. Is the money a gift? Is it a loan? Or is it an actual mortgage that you’re expecting to be paid back to you with interest? You want to make sure everything is documented as much as possible.

Make it official

Having a legal document can help to ensure that the expectations of all parties are consistent. It might seem weird or confronting to drag lawyers into a family matter, but it’s the only way to stop matters being misinterpreted in a potentially disastrous way.

The stakes are too high not to do things by the book. After all, if things turn ugly, what’s potentially at risk is your relationship with your kids, their relationship with their siblings, and even your child’s relationship with their partner.

Having legal documentation makes any agreement clear, above board and no-one can get confused about the situation.

Tyler can attest firsthand to the complexity of the issue. After buying his family house with parental support, he and his wife subsequently broke up. But when it came to their division of assets during the divorce, they had nothing in writing about the different size of contribution each set of parents had made. What stopped things from getting messy was the joint decision to recognise the individual contributions from family when it came to the eventual settlement of the house.

“It could have gone so much worse,” he says. “It was all based on trust and honesty, which can be hard to come by in a separation.”

“I would definitely encourage anyone considering a family loan or early inheritance to speak to a lawyer or, at the very least, putting things into writing so there's a record there for everyone. That, for me, would be the key lesson.”