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The Bank of Mum and Dad
Lending money to your children to buy their first home can be a generous and life-changing move, but it’s essential to consider the legal implications before proceeding.
- Family relationships need to be considered, for example whether you (the lender) are in a different relationship to your child’s other parent, the status of your child’s relationship with their own partner (if any), and to what extent you should consider the position of your other children. Future scenarios should be thought through, for example how you might protect your loan funds from a relationship property claim against your child by their ex-partner. Relationship property law can be complex, but is vitally important to think about.
- Estate planning matters can also influence how you gift or loan money to your child. Factors to consider include the size of the loan or gift, how it may affect what you’d like to gift in your will when you die, how it may affect entitlements of other beneficiaries and whether there is a risk of a potential Family Protection Act claim against your estate in the future.
- Formalising the agreement is the best way to ensure that your interests are protected and you or your loved ones aren’t out of pocket or feeling aggrieved later on. The form an agreement takes will depend on a number of factors such as whether it is a gift or loan, the source of funds (for example whether from you personally, a family trust or company), the terms and conditions of any loan (such as repayment timeframes, interest if any, how to deal with missed payments).
- Other considerations include tax, whether you should hold a registered interest on the title to the property, and whether you might share in any capital growth of the property. If you are asked to guarantee your child’s loan with the bank. The bank is likely to require you to take independent legal advice, as you become legally responsible for repaying the loan if your child defaults on their repayments.
There’s no ‘one size fits all’ scenario. Any lending arrangements with your child should be tailored to minimise the risks to both parties, as well as those of your wider family, and ultimately your estate once you are gone. Call one of our property and estate planning team if you wish to discuss further.
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