Protecting transfers to children is not simple, say lawyers, advisers and brokers.
When it comes to banks, mortgage broker Aileen Ho of Strategic Brokers says a couple with a combined household income of $250,000 living in Sydney with no debts or dependants would have a maximum borrowing power of $1.35 million.
But if they were to accept a $10,000 loan from family members, their borrowing capacity would fall by $30,000 to $1.32 million. In accepting a $100,000 loan, their borrowing power would fall to $1.08 million. A $200,000 loan would push their borrowing capacity down to $820,000.
James Hawthorne, an adviser at Koda Capital, published a report on family gifts in 2020. He was concerned that too many parents were giving too much money and struggling in retirement as a result. Since then, the number of conversations he’s had with clients on the topic has increased.
Loans v gifts
While most of his clients release funds as a gift if it’s less than six figures, he says it’s important to understand how loans versus gifts work in the eye of the law.
“That’s one of the sticking points that we’ve seen,” says Hawthorne. “I do see parents wanting to structure it as a loan, but really they see it as a gift. The problem is that the banks take a different view on it.”
“Having a formal loan agreement can reduce the child’s borrowing capacity and affect their ability to service the mortgage,” says Strategic Brokers’ Ho. “Banks will take this debt into account when assessing the child’s financial situation.”
While some people think that the banks only take a harder look at family loans if the borrowers have less than a 20 per cent deposit, she says that’s just not true.
“It doesn’t matter what loan-to-value ratio the borrowing couple has, the banks will still treat that family loan as a loan,” says Ho.
Hawthorne is “not a huge fan of loans”.
“They add complexity, enforcement can be awkward and they may affect the child’s ability to borrow. They also tend to result in a larger overall commitment by the parents, which may affect their own financial position and retirement plans.”
You can’t ‘both-ways’ it
Lawyer Will Stidston of Barry Nilsson warns that if families try to get around the lowered borrowing capacity by labelling their gift as a loan without any recorded expectation that it will be paid back, family courts are far more likely to consider it to be a gift, and consider it as part of the pool of assets.
Four in 10 would-be buyers aged 25-34 expect to ask their parents for help getting into the market, according to the Australian Housing and Urban Research Institute.
“My practice is seeing this discussion more as parents want to help their kids into the market,” says Stidston. “Then they have this problem of, ‘Hang on a second, if we’ve got this in a loan agreement, we have to disclose it to the bank, and then it’s treated like any other liability’.”
Sometimes families decide not to disclose the loan to the bank, or they enter into an agreement after the bank has approved the mortgage.
“That can be all well and good, but what can happen is that if there’s a separation, the spouse of the adult child might say, ‘That wasn’t a real loan. So I don’t agree that any monies have to go back to your parents’,” says Stidston.
He says the Family Court has broad discretion and can argue that a parent is never going to bankrupt a child, effectively rendering that quasi-loan agreement void and returning that cash to the pool of divisible assets.
“You can’t represent to a bank that it’s not a loan and then try to represent to others later that it is a loan. There’s an evidentiary issue there.”
Instead, Stidston says he’s seeing more parents require their children to enter into a binding financial agreement that ensures that the money flows back to the parents in the event of a separation. These also aren’t completely infallible, but if they’re well constructed, and aren’t designed to leave one party unfairly disadvantaged, they’ll usually hold up, he says.
Legal firm Australian Family Lawyers recorded a 101 per cent increase in the number of binding financial agreement inquiries in 2023 compared to 2022, while inquiries on how to protect assets such as family loans increased 97 per cent over the 2024 financial year.
A binding financial agreement will generally cost $3500-$10,000, says legal firm Arcadian Legal.
Bryn Evans, private wealth adviser with Integro Private Wealth, says binding financial agreements can be used to “quarantine” support from one set of parents in the event of a split.
“Typically I’ve seen situations where they say, ‘We don’t want this to be repaid. We’re just going to help our children by providing some money for the purchase of a property, and we’re putting this agreement in place to keep that money within the family’,” Evans says.
“I would always say people need to understand what the pros and cons are, and the steps that you should take for the agreements to stand up because there’s contestability in this space.”
The other options
For families seeking to help their kids into the market, there are three other ways that brokers and advisers see them do it.
Go guarantor: Ho says this is the most popular choice as many families don’t have the spare cash for a gift, but they can use their own homes as collateral.
Help service the loan: Evans says other families choose not to help their kids with the deposit hurdle but with serviceability down the line. “I’ve certainly seen situations where family members park money in a relative’s offset account to offset non-deductible interest,” he says.
“This was very common a few years ago when you were getting nothing in savings accounts.”
Use family guarantee term deposits: Ho says these are an often overlooked option that some lenders, including Westpac and IMB, accept.
“The parents, instead of giving cash to the kids, give it as a term deposit,” she says. “And then parents get the interest return on the term deposit.”
Fellow mortgage broker Marissa Schulze of Rise High says this may be a better option for parents who want to get their kids into the market sooner, without losing control over their funds.
“This is a scenario where parents can put their money in a term deposit with some lenders, and the child can borrow against it. That’s probably a preferential option for parents who want to put money in and get that money back eventually, but want to be able to get their kids into the housing market sooner.”