More people than ever are leaning on their parents for support getting in to their first home or starting a new business.
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.
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 % of First Time Buyers Borrowing Money From Their Parents Has Been Increasing Dramatically
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.
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.
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.
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.
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.
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.
“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).”
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.
Tim K. Dean, Credi Founder | Commentator & Expert on Family Lending, Bank of Mum & Dad and Neo-Credit Scores is available for media interviews and appearances. More…
Credi Pty Ltd is a Financial Technology business, not a marketplace lender. Our mission is to change the way we lend money. We want to empower people to help each other and take control of their financial relationships without creating friction and stress.
Credi is the World’s #1 loan management platform for private lenders.