The Dangers of Lending to Loved Ones for Real Estate Purchase

Property prices in NSW have escalated in recent years, particularly when compared to increases in wages. 

As a result, it is becoming common for parents to lend money (unsecured) to their children in order to help them to buy a home. These moneys may contribute to the deposit or more and are often used to make it easier for children to obtain finance.

It is not uncommon for bank lenders to require borrowers to provide written evidence from the parent or relative that any funds that the parent has provided have been "given" to the borrower before the bank will enter into a loan agreement with the borrower.

For the most part, these arrangements go to plan.

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But what happens when the plan fails?

Loans to family members are very vulnerable unless you take deliberate steps to demonstrate that you intend to enter into a legal contract and that a legal loan contract was in fact entered into.

If, for example, the owners of a property are registered as Joint Tenants, and one of those owners becomes bankrupt, the Trustee in Bankruptcy will seek to deal with the persons interest in the property. 

Sometimes family members will seek to claim as a creditor of the Bankrupt Estate or they may seek to claim some equitable interest in the property on a resulting trust basis. The resulting trust is argued on the basis that the children would not have been able to purchase the property without the funds having been advanced by the related party.

However, the Trustee in Bankruptcy is entitled to rely on the presumption of advancement. The presumption is that in the absence of documentation or other evidence confirming the actual intention of the parties, the funds were intended as a gift.

When parents lend money to adult children to purchase a property, they often lend it to the child and their partner. 

 If the relationship later deteriorates and parties split up, parents will sometimes try to claim back the moneys loaned to both children. Whilst the Family Court may consider these as a loan to the parties and order the repayment of the funds to the person who loaned them to the parties, without an written agreement, there is little chance of this occurring. However, the Family Court may consider the moneys loaned by the parents to be a contribution by the child of the parents to the relationship and may result in a division of matrimonial property that is in the favour of the child because of the financial contribution by the parents.

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And, the moral of the story is?

Don’t lend more to your loved ones than you can afford to lose.
Alternatively, see a lawyer at Priest Legal and carefully consider your options including entering into a legally binding loan agreement.