The Australian dream of homeownership is increasingly being financed by the “Bank of Mum and Dad.” With property prices soaring, it’s now common for parents to contribute tens, or even hundreds, of thousands of dollars to help their children secure a first home.
It’s a generous act of love. But it’s also a significant financial risk.
What happens if your child’s relationship ends? Without the right legal protections, the money you intended as a secure loan could be treated as a gift and split with their ex-partner in a property settlement. Your substantial investment could be halved, or lost entirely.
At Hayton Kosky, we see the devastating consequences of informal family loans all too often. Here’s our guide to ensuring your financial support is legally protected.
The Legal Minefield: Why a “Loan” Can Be Mistaken for a “Gift”
In the eyes of the Family Court, money given by a parent to a child is presumed to be a gift, born from natural love and affection. This is known as the “presumption of advancement.”
To protect your money, you must actively rebut this presumption with clear evidence that the money was, and always has been, intended as a loan.
The difference is critical:
- If it’s a Gift: The money becomes part of the couple’s shared asset pool. In a separation, it is divided between the parties.
- If it’s a Loan: The money is treated as a debt that must be repaid to you from the asset pool before the remaining assets are divided.
Simply calling it a loan isn’t enough. You need to prove it.
Building a Fortress: 3 Keys to an Enforceable Family Loan
To ensure your loan is recognised by a court, you must treat it like a formal, commercial transaction from day one.
1. The Formal Loan Agreement: Your Foundation
A handshake deal is not enough. The most crucial piece of evidence is a legally sound, written loan agreement, professionally drafted by a solicitor. It is the foundation of your protection and should clearly state:
- The Parties: The lenders (parents) and the borrowers (your child and, ideally, their partner).
- The Amount: The exact sum being loaned.
- Terms of Repayment: A clear schedule, even if payments are deferred until the property is sold.
- Interest Rate: A commercial interest rate strengthens the argument for a genuine loan. Even if you choose not to charge interest, the agreement should state this (e.g., an interest rate of 0%).
- Trigger Events: What happens if the relationship ends, a partner dies, or the property is sold? The agreement should make the loan repayable in these scenarios.
2. Security: Don’t Be an Unsecured Creditor
A loan agreement on its own is good, but a secured loan is far better. Securing the loan against the property you are helping to buy gives you a legal interest and places you in a much stronger position. The two most effective ways to do this are:
- Registered Second Mortgage: This is a strong form of security registered on the property’s title. It gives you a clear legal claim, though it requires the consent of the primary lender (the bank), which is not always given.
- Unregistered Mortgage Protected by a Caveat: This is a very common and effective strategy. You and the borrowers sign a formal mortgage document that isn’t registered. To protect that interest, we then lodge a caveat on the property’s title. A caveat acts as a public ‘warning’ that you have an interest in the property, preventing it from being sold or refinanced without your consent.
3. Consistent Conduct: Act Like a Lender
Your actions must match your documents. A court will examine whether the parties have behaved as if a genuine loan exists. Sporadic or non-existent enforcement can weaken your position. While you don’t need to be aggressive, occasional communication, such as an annual statement showing the loan balance, helps to reinforce the commercial nature of the arrangement.
The Gold Standard: Binding Financial Agreements (BFA)
While the steps above provide excellent protection, the most robust and certain method is a Binding Financial Agreement (BFA).
A BFA is a private contract between a couple that dictates exactly how their assets will be divided if their relationship ends. It allows them to “contract out” of the standard Family Law rules.
A BFA can explicitly quarantine the funds you provide, ensuring they are returned to you or remain the sole property of your child, regardless of whether they were provided as a loan or a gift. For a BFA to be legally binding, both parties must receive independent legal advice before signing.
Don’t Leave Your Family’s Investment to Chance
The generosity of the Bank of Mum and Dad is a cornerstone of the modern property market, but it should not come at the cost of your own financial security. An informal arrangement is a gamble you cannot afford to take.
Investing in professional legal advice at the beginning of the process is a small price to pay to safeguard a substantial financial contribution.
If you are considering lending money to help your child buy a home, contact the expert family and property law team at Hayton Kosky. We can help you structure your arrangement correctly and give you the peace of mind that your investment is secure.