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Bank of Mum and Dad: gift or loan?

By March 24, 2022February 23rd, 2024No Comments

You have probably heard of the “Bank of Mum and Dad” (BOMAD), being the colloquial term referring to parental funding intended to help offspring purchase a property. The rise of the BOMAD has been astounding in recent years. Figures show that the BOMAD is now Australia’s ninth biggest mortgage lender, financing a massive 60% of first time home buyers. Parental contributions average around $92,000 each, or 84% of the average first home buyer deposit.

A total of $34 billion has been lent by the unregulated lender BOMAD—more than many actual big bank lenders. But when it comes to obtaining funding from BOMAD, there may be important considerations to bear in mind, including whether the monies are being provided as a gift or loan. This can be especially important in terms of family law outcomes. Let’s take a closer look.

[Bank of Mum and Dad: gift or loan?…continued]

BOMAD helps adult children in various ways. Most commonly, parents may act as a guarantor or provide cash funds for a deposit. Or, they may allow adult children to live rent-free in order to save a deposit. In some cases, they may buy their children a house outright. 

Parents may make these provisions as a gift or as a loan to be repaid. Sometimes, however, there is still the expectation that an apparent ‘gift’ be repaid.

Gift or loan?

BOMAD parents often worry about what would happen if their children’s marriage breaks down—how will the funding be treated in a property settlement? Although they want to help their children financially, they also want to protect family money and not have it claimed by an ex in the event of divorce. And a lack of clarity over whether advanced funding is a gift or a loan is where problems can arise.

Essentially, gifts are treated as part of the matrimonial asset pool which can be split by the parties. Gifts are typically not enforced to be repaid. By contrast a loan can be enforced to be repaid on the terms of the agreement, and is listed as a liability on the balance sheet.

Deciding whether or not funding should be a gift or a loan depends on the circumstances. There can be repercussions for parents if they advance funds as a gift. For instance, it could impact their entitlement to the age pension or other Centrelink benefits. And yet, if it is to be a loan, they may have to pay tax on the interest. 

Further, if it is a gift, it could be seen as an early inheritance, necessitating Wills to be updated to balance out provisions for siblings who may not have received help. On the other hand, if it is to be loan, it requires formal documentation and the ability to be enforced.

Whatever choice is made by BOMAD, it needs to be very clear whether advanced funding is a gift or a loan.  If it will be a loan, repayment and interest terms need to be clear. It’s very important that a loan is really a loan and not a gift.

Hard or soft loan?

Finance professionals talk of ‘hard loans’ v ‘soft loans’. Hard loans are what you would expect from a bank—the terms of the agreement feel like a commercial arrangement, the sum involved is significant and therefore unlikely to be waived away, there has been no delay in enforcing the repayment obligation, and there may have been attempts to recoup repayment (such as payment demands or threats of litigation).

On the other hand, BOMAD loans are more likely to be categorised as ‘soft loans’. These are typically informal arrangements with friends or family who are on good terms, the sum might be relatively small and potentially waived, there are no written demands for repayment, and there has been a delay in enforcing any repayment obligations. With soft loans, the lender typically won’t want the debtor to experience hardship as a result of the loan repayments or defaults and this impacts enforceability. When it comes to deciding whether funds are a gift or a loan, enforceability of repayment is a big factor.

In order to protect the status of a BOMAD loan and avoid it being categorised as a gift, you should aim to mimic the arrangements of a hard loan. That is, consider taking the following steps:

  • Have a formal loan agreement document drawn up.
  • Always refer to the loan as a loan in all communications.
  • Repayments should be made on a regular basis.
  • The debtor’s spouse should provide written acknowledgment that it is a loan and not a gift.

Key takeaway?

If you and your family are considering a financial arrangement to help a family member enter the property market, ensuring you put in place the correct protections is vital. Make sure you get independent legal and financial advice before entering any agreement. And if it is decided that the monies should be a loan, then make sure to set up a formal legal agreement with clear terms so that it doesn’t later get categorised as a gift.

If you would like legal advice regarding a family law matter, please contact Canberra family lawyer Cristina Huesch or one of our other experienced solicitors here at Alliance Family Law on (02) 6223 2400.Please note our blogs are not legal advice. For information on how to obtain the correct legal advice, please contact Alliance Family Law.


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