The Bank of Mum & Dad
The Bank of Mum and Dad, the expression commonly referring to parents lending their children money, usually to cover the deposit on their first home, is now one of Australia’s largest lenders, according to research from Digital Analytics. The size of the loan book equates to over $35 billion, and given the rising property prices in Australia, it’s unlikely that this will slow down any time soon.
With loans between family members comes the potential for financial risk and stress, as well as even disputes in the future. It’s important to be fully aware of what you’re getting yourself into, what the long-term implications could be, and to ensure that both parties are crystal clear of the expectations set.
This week our team at Ally Wealth Management is outlining our key tips when it comes to lending money to family members with the aim of reducing the risk of financial disaster and personal disputes in the future.
- Write it down
If you are lending money to your family, even if you’re not seeking to charge them interest, put it in writing. A documented loan agreement should be in place, which covers the following as a minimum:
- The loan amount
- Any interest rate that is applicable
- The expected time frame for it to be repaid if specified
- The expected repayment amounts if specified
- Who is responsible for repaying the loan
- Any penalties that will apply if repayments are not met
- Any collateral that is being used
While this might seem very formal for a simple loan to your children or other family members, by documenting the terms of the loan, it ensures that all parties are perfectly clear about what is expected of them, and when the loan needs to be repaid. This reduces the potential for disputes in the future if you expect the loan to be repaid within 2 years, while your kids assume it’ll just get taken out of their inheritance.
- Consider whether to include it in your tax return
It’s important to speak with your tax (financial) adviser and consider whether any interest that you are receiving on your loan should be included in your tax return. Again, this highlights the importance of having your home loan documented clearly to ensure that you have all of the right documentation in place should you need it.
- Any impacts to social security/pension payments?
It’s also important that you consider, and seek professional advice to explore, whether the loan will impact any eligibility you may have for Centrelink or other pension payments. A formal loan that is to be repaid may remain part of your assets, while if the loan is designed to be a gift, then the gifting provisions may apply here. Each scenario can have a significantly different impact on your pension entitlements, so it’s important to ensure that you do your homework upfront.
- Consider updating your estate planning
You may also want to consider whether you need to update your Will or any other relevant estate planning documents to reflect the loan, and what the expectations would be for it should you pass away. Would you expect that the loan would still be repaid to your estate, or would you be happy to treat the loan as a gift in this instance, and ‘forgive’ the outstanding balance?
While this could be considered to be a morbid topic, the more scenarios you think about and plan for, the less likely there are to be any negative surprises in the future.
If you’re considering lending money to your children or other family members, and aren’t quite sure where to start, reach out to our team at Ally Wealth Management, and we can put you on the right track here.
Ally Wealth Management is the trusted ally in finance for Australians at home and across the globe. As both Australian expats and residents, the founders of Ally have a unique understanding of the common personal financial challenges faced.
Book your complimentary appointment with our team at Ally Wealth Management to discuss how we can help you to achieve your financial goals.
Ally Wealth Management Pty Ltd is a Corporate Authorised Representative of Sentry Advice Pty Ltd ABN 77 103 642 888. Sentry Advice holds an Australian Financial Services Licence (AFSL) No. 227 748.
General Advice Warning: The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances, and objectives. We recommend you obtain professional financial advice specific to your circumstances.
