The Bank of Mum and Dad – What First Home Buyer Should Know – 5 Key Points

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The “Bank of Mum and Dad” refers to the practice of parents or family members helping their children financially to purchase their first home, and especially within Australia, many first home buyers can not enter the market without their parents’ assistance.

This assistance could come in the form of:

A gift;
A loan;
Co-signing on a mortgage or
other financial arrangements.

If you’re a first-time homebuyer considering getting help from the Bank of Mum and Dad, here are 5 key takeaways you should know before entering into this arrangement.

2. Financial Impact on all parties

When borrowing money from your parents, you need to consider the financial impact on them also. If the family member has the funds readily available, it could be a win-win situation for all. However, if lending the money strains their finances or future plans, it might not be the best choice.

You also need to consider what happens if your parents require the funds to be repaid due to an emergency or their own situation – how will you access the funds to pay them back?

Other things to consider include how it will affect Centrelink (if they are aged pension age – or likely to be in the near future), who will fund their RAD (Refundable Accommodation Deposit) for placement in a retirement home (if care is required) and how their future needs will be met if their money is tied up in your property?

Part of the planning process is having a clear plan as to how to address these issues prior to borrowing money.

Five Critical Considerations for First Home Buyers

1. Clear Terms and Formalised Legal Agreements.

Establish clear terms for the loan, including the interest rate, repayment schedule, and consequences for missed payments. Put everything in writing to avoid misunderstandings later.

At ALA Law we regularly prepare Loan Agreements which set out the perimeters of the agreement between relatives from the outset. This means everyone understands the agreement, rules, and their obligations. We can also attend to the registration of the agreement by way of a mortgage or caveat to secure everyone’s interests.

This means less disagreements in the future and a clear path forward.

2. Financial Impact on all parties.

When borrowing money from your parents, you also need to consider the financial impact on them also. If the family member has the funds readily available, it could be a win-win situation for all. However, if lending the money strains their finances or future plans, it might not be the best choice.

You also need to consider what happens if your parents require the funds to be repaid due to an emergency or their own situation – how will you access the funds to pay them back?

Other things to consider include how it will affect Centrelink (if they are aged pension age – or likely to be in the near future), who will fund their RAD (Refundable Accommodation Deposit) for placement in a retirement home ( if care is required) and how their future needs will be met if their money is tied up in your property?

Part of the planning process is having a clear plan as to how to address these issues prior to borrowing money.

3. Long Term Consequences & Planning

Consider the long-term implications of this assistance on your financial goals.

How does it fit into your overall financial plan?

Will it impact your future ability to secure loans or mortgages?

You also need to consider what effects it may have on your parents. For example, do they intend on selling the house you are using as security in the near future? Will they need the money they are loaning you to pay for health treatment or a RAD in the near future?

4. Family Dynamics – Emotional Factors.

When reaching an agreement to borrow money from your parents – family dynamics play a huge role. Borrowing from family can carry emotional weight, and it’s crucial to navigate these feelings with sensitivity.

In addition, you may need to consider siblings, or others who have a financial interest. Also, consider things such as “will this loan be forgiven on the death of your parent? Or will it need to be adjusted in their estate?” Discuss these issues with family in an open and transparent environment where possible.

9. Family Dynamics – Emotional Factors

When reaching an agreement to borrow money from your parents – family dynamics play a huge role. Borrowing from family can carry emotional weight, and it’s crucial to navigate these feelings with sensitivity.

In addition, you may need to consider siblings, or others who have a financial interest. Also, consider things such as “will this loan be forgiven on the death of your parent? Or will it need to be adjusted in their estate?” Discuss these issues with family in an open and transparent environment where possible.

5. Exit Strategy – Stage left!

You must have your own exit strategy. You need to consider what would happen if the relationship sours or if the family member needs the money back unexpectedly. How will you get the money together to repay the loan? Having a clear exit strategy in place can help alleviate potential stress.

Remember that while the Bank of Mum and Dad can provide valuable assistance, it’s essential to approach the arrangement with care and consideration for the long-term impact on your finances and relationships. Consulting with financial advisors and legal experts can provide you with the guidance needed to navigate this important decision.

The Team at ALA Law are experts at navigating this process and act for both parents and children in relation to Loan Agreements, Mortgages and securing interests by way of caveat. Although it seems overwhelming, transparency from the outset is essential to ensure smooth sailing during this exciting period of purchasing a home!