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The Bank of Mum and Dad revealed as one of Australia’s largest and most trusting financial institutions, but at what cost?

The generosity of individuals lending money to their children to support them getting their first home or running a small business can be a recipe for disaster without the right protection and documentation in place.

More people than ever are leaning on their parents for support getting in to their first home or starting a new business.

A recent report showed the Bank of Mum and Dad is the 10th largest lender in the country, and funding over $20 Billion in loans.

An article released this week in the Australian Financial Review revealed that the Bank of Mum and Dad is responsible for 25% of SME loans.

The Size of Help For First Home Buyer Deposits Has More Than Doubled In The Last 8 Years.

Thanks to the Royal Commission, the pressure on the banks has created a tighter lending environment with borrowers finding it harder to get their loans approved.

 

The % of First Time Buyers Borrowing Money From Their Parents Has Been Increasing Dramatically

$20 Billion in Loans From Mum and Dad in 2017

Not only are the banks forcing people to seek alternative means to fund their first home deposit or support for small business, it is creating a minefield of risk that most people seem blissfully unaware of.If the banks are tightening up their lending policies, does that mean high risk lending is now being inherited by The Bank of Mum and Dad?

Lending money without a written loan agreement is like jumping out of a plane without checking your parachute works – the consequences of overlooking such a simple thing can be dire.


We did some research to find out what happens when these loans go wrong to help our readers understand the risks involved with this type of lending activity.

Loan Disaster Story #1 – Father loses $250k loan to son through broken marriage

A self-funded retiree, Jerry, lent his son, Homer and his partner, Margery $250,000.00 for the purchase of a property. Homer was about to ask Margery to marry him and Jerry was excited for the possibility of a grandchild.

Years passed and Jerry didn’t request any payment of interest or repayment of any of the principal. Seven years had now passed and Margery commenced property proceedings against Homer. Jerry tried to make an application to the court that his loan was a genuine loan and he expected it paid to help him fund his retirement. The court found that the money was at best a financial resource of Homer and not a genuine loan, as no repayments had been made or requested until the relationship was in difficulty.

Loan Disaster Story #2 – Parents lose $280k through undocumented business loans

In 2017, a court in Brisbane heard the case of a son who refused to repay the A$280,000 his aged parents loaned him over several years to keep his business running. He had taken loans from his parents 13 times between 2009 and 2013. Some were sums offered for personal reasons, and some were for his business. The problem was the parents could not prove they had legally enforceable loan agreements with him.

Murray Berghan said he’d accepted the money his parents, Barry and Lorraine – both in their 70s – offered him as a “gift” and not as a loan. If they had documented the loan – even in a simple way, it could have been enforceable.

Loan Disaster Story #3 – Family torn apart by $163k loan to daughter

Lucy promised to pay her parents rent until she had repaid the entire cost of the loan, at which point the house would then be returned to her ownership.  After reaching that alleged verbal agreement, Mr and Mrs Joy remortgaged their three-bedroom home to cover Lucy’s debt. A month later, they contacted Lucy to ask when she would sign over the deeds to the house, which she declined to do. They finally took her to court in 2017 in a last-minute bid to recover their losses, but lost their case this month.

A judge ended up ruling in Lucy’s favour after she argued the money had been given as a gift and not a loan.

How can you avoid a disaster with your loans?

If you’re considering lending money to your children for a home or for their business, the value of protecting your money through a written agreement is hard to ignore.

“These simple measures are often for the benefit of familial relationships — settling clearly these issues early, although potentially awkward, is better than losing the relationship later to an ugly dispute.” said Sydney barrister, Bridie Nolan in an article on news.com.au about the $163k loan dispute above.

How can Credi help you?

The cost of using an online service like Credi is insignificant to the heartache of getting this wrong.

From only $88, you can formalise a loan agreement online and get it eSigned by both parties with a professional loan contract created by legal professionals. This may reduce your risk of any disputes and will work as a single source of truth for the loan agreement and the repayment schedule for the loan.

Did you know you can secure a loan agreement against assets?

“When family members advance funds to the business, they often don’t realise they can secure the loan, much like a bank does.” says James Katsoukos of BRI Ferrier, a national insolvency advisory firm.

Credi can also setup a PPSR secured loan agreement online at a fraction of the price of seeing a professional services firm that could require several meetings with extremely high hourly rates.

Katsoukas explains “In the past, when a business asked a bank for a loan to cover potential shortfalls, the bank would traditionally take a security in the form of what was called a ‘charge’. Nowadays, any security a bank takes over a company is registered on the Australian Government’s Personal Property Securities Register (PPSR).”

Need help protecting your money tied up through informal loan agreements?

Get in touch with the Credi team to explore how Credi’s online loan management platform can help. Setting up an account is free and there is even a mobile app to keep track of your agreements and the related repayment schedules.

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Tight lending conditions set to increase first-home buyers’ reliance on bank of Mum and Dad

First-home buyers are expected to increasingly rely on the bank of mum and dad to get on the property ladder, despite improving affordability in Australia’s biggest housing markets.

Experts say tighter lending conditions mean more buyers will require parental assistance to buy a home, even though median house prices have fallen in Sydney and Melbourne.

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Reference:  https://www.domain.com.au

Are advisers at risk of losing wealth across generations?

Financial planners are being urged to consider what happens to their business models if they fail to ensure that the wealth they currently advise on stays with the firm as it is passed down the generations.

A host of reports over the past few year have identified a growing need for advisers to come up with ways to ensure families and children of existing clients are well served and stick with the firm as the typical baby-boomer client bank ages.

As one of its 11 trends to watch in a report in July last year, SEI noted that the size of the traditional client bank of over 50-year-olds is a highly competitive space in wealth management, but because even most new clients are in their fifties and younger generations lean on the Bank of Mum and Dad more and more, areas like estate planning must be at the forefront of advisers’ minds.

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Source: https://www.moneymarketing.co.uk

Credi Partner

Protect your trusted relationships.

Credi Partner is a comprehensive loan management system, adding to the Credi suite. Quickly administer loan agreements on the Credi Partner platform on your client’s behalf – enquire now.

 

Tech Exchange 2018

We are co-sponsoring the Tech Exchange in Melbourne and Sydney (fully booked) this year. We cordially invite you to the event that will start at the CPA Australia in Southbank on the 16th of August at 7:45 AM.

Our CEO Tim Dean will be giving a presentation on “How do you deal with informal loans in business” in connection with an interactive exercise at 1:45 PM.

You can register for this event for free:

By attending this presentation, you will learn how to:

• Give high-value business advice that preserves family wealth and relationships
• Identify the most effective tax treatments for informal loans
• Minimise the risk of default and prioritise family lenders before other creditors

Be introduced to new ideas and how to use technology to improve efficiency and add value to your business, allowing you to focus your attention on your organisation’s objectives.

Did you see Credi CEO – Tim Dean’s interview for CPA’s InTheBlack?

Image Source: intheblack.com

We all want to help out where we can when it comes to family but it’s important to have the right documentation in place in order to stop potential heartache and risk of default.

“Tim Dean, founder of cloud-based loan documentation (and management) service Credi, believes a simple paperwork process, which keeps both parties on their toes, is the answer. The idea of going to a lawyer to draw up an agreement would not excite most parties, Dean says, and yet documentation will remove that uneasy conversation about last month’s missing repayment. Dean’s site has a loan-builder module which, he says, can do the complicated maths and present the loan in an easily digestible package.

“Some people deal in rates, while others say: ‘I’ll lend you A$100,000; you can repay me A$101,000 back in two years’ time’. Others may want monthly repayments. The platform can handle all the different scenarios,” says Dean.”

Source: www.intheblack.com

Read Full Article 

 

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The newest addition to Fintech Australia’s board Tim Dean Credi’s CEO

For the newest addition to Fintech Australia’s board, the name of the game is helping WA find its place.

Tim Dean, founder and CEO of relationship-based lending app Credi, will join the board of Fintech Australia following CrowdfundUP founder Jack Quigley’s departure.

Fintech Australia is the fintech industry’s national body, providing everything from networking to advocacy.

Tim said he’s hoping to help WA fintechs, who according to EY currently make up 9% of the industry nationally, carve out their own niche.

“[I’ll] be meeting in August [with the CEO of Fintech Australia] to nut out a whole bunch of initiatives that bring fintech in Western Australia into the fold on a more inclusive basis, but also … to develop some initiatives that give fintech WA its own identity,” he said.

“Having an identity is useful because everyone needs a role to play, and it can be a home for a relationship with Asia, then that suddenly can build as a core strength to its offering.”

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Source: www.startupnews.com.au