If your children are looking to borrow money from you as their parents to buy their first home, there are some things to be aware of. You may not realise that if you loan your children $100,000, their borrowing power from the banks will decrease by $270,000. This is because banks factor in family loans when assessing a couple’s ability to repay.
This scenario presents a challenge for parents wanting to help their children enter the property market. If money is given as a gift, it’s at greater risk of being divided if the recipient and their partner divorce. If the money is structured as a loan, lenders will limit their funding accordingly.
With more borrowers turning to the “Bank of Mum and Dad,” parents are advised to consider alternatives to loan agreements if they want to protect their gifts in the event of a divorce. Protecting these transfers is complex, say lawyers, advisers, and brokers.
A couple with a combined income of $250,000 with no debts or dependents has a maximum borrowing power of $1.35 million. However, accepting a $10,000 loan from family reduces their borrowing capacity by $30,000 to $1.32 million. A $100,000 loan drops their borrowing power to $1.08 million, and a $200,000 loan reduces it to $820,000.
James Hawthorne, an adviser at Koda Capital, highlights the dilemma of parents giving too much money and struggling in retirement as a result. Since publishing a report on family gifts in 2020, he’s had more conversations with clients about this issue. While most clients gift funds if it’s less than six figures, it’s important to understand the legal implications of loans versus gifts.
If a family try to label a gift for a home payment as a loan without any expectation of repayment, family courts are likely to consider it a gift and include it in the pool of assets.
A survey by the Australian Housing and Urban Research Institute found that four in ten potential buyers aged 25-34 expect to ask their parents for help. Parents are increasingly requiring their children to enter into binding financial agreements to ensure money flows back to them in case of a separation. While not infallible, well-constructed agreements are more likely to hold up in court.
Australian Family Lawyers recorded a 101% increase in inquiries about binding financial agreements in 2023 compared to 2022, with inquiries about protecting assets like family loans up 97% over the 2024 financial year. A binding financial agreement generally costs $3,500-$10,000.
Binding financial agreements can quarantine support from one set of parents in the event of a split. These agreements help ensure that the money stays within the family.
For families seeking to help their children into the market, we suggest,
- Go guarantor: Using their own homes as collateral.
- Help service the loan: Assisting with loan payments down the line.
- Family guarantee term deposits: Using term deposits as security, which some lenders accept.
These options can provide parents a way to support their children without losing control over their funds.
If you would like any advice in regards to this, please contact Cadre Capital Partners for specific advice.
