A couple wanted to buy a property for their young family, but were not eligible for sufficient mortgage finance from the bank.  Fortunately, the man’s parents came to the rescue with a substantial lump sum.  This sum covered the mortgage borrowing that the couple would otherwise have required. 

The couple and the paternal parents discussed a repayment agreement in general terms – but not in writing – and several irregular payments were made over the following two years.

Unfortunately, the lack of regularity of these payments bothered the parents, who asked for a regular financial commitment from the couple.  This was ignored.  Eventually the man’s parents commenced legal proceedings for recovery.  A family rift ensued.

 Using the “bank of mum and dad” to finance the purchase of a property has become increasingly common amongst first-home buyers. While this comes with many perks and children get a helping hand onto the property ladder, it can lead to issues with bank finance, ownership arrangements, and can be a recipe for dispute between family members.

We outline a few areas to consider below.

Is the money a gift or loan?

Problems can arise where parents and children have different ideas, or recollections, in respect of whether the financial assistance is a gift that does not need to be paid back, or a loan.

Both parents and children should agree on the terms of the assistance from the outset and record this in writing. If the money is a gift, banks will require a statement to this effect, such as a Deed of Gift.

If in fact the money is a loan from the parents, then all parties should enter into a Loan Agreement. The Loan Agreement should record the amount of the loan, when it needs to be repaid, and the interest rate on the loan. Banks may count a loan from parents as part of a borrower’s liabilities which may mean the bank reduces the amount they are willing to lend to the borrower. The bank will also expect to be the priority creditor on the lending against the property.

What is the ownership arrangement?

If the parents’ names are to be recorded on the title of the property, then it may be appropriate to enter into a Property Sharing Agreement (also known as a Co-Ownership Agreement). A Property Sharing Agreement sets out each parties’ rights and obligations in respect of the property and can include:

  • Who is responsible for the mortgage, outgoings, utilities, and maintenance of the property;
  • What happens if one party dies, enters a new relationship or separates; and
  • What happens if a party wishes to sell their share in the property and how their share will be valued.

 What happens if things go wrong?

If a dispute arises between parents and child over the property and there is no Property Sharing Agreement in place to determine what happens with the property, the Court can step in and order a division of property among co-owners. An order may be:

  • For the sale of the property and the division of the proceeds among co-owners;
  • For the title of the property to be partitioned among the co-owners; or
  • Requiring one or more co-owners to purchase the share in the property from one or more co-owners at a fair and reasonable price.

When making an order, the Court will have regard to the following factors:

  • The number of co-owners and their respective shares in the property;
  • The nature and location of the property;
  • The hardship that would be caused to the applicant by the refusal of the order in comparison to the hardship caused to any other person involved by the making of the order;
  • The value of any contribution made by any co-owner to the cost of improvements to, or the maintenance of, the property; and
  • Any other matters the Court considers relevant.

It therefore helps for parents and children to have some formality in place regarding the sharing and ownership of the property. Going to Court is a last resort but the Court will still be able to provide a remedy if things go wrong.

Both parents and children should seek independent legal advice from a legal professional to discuss their options.

Leading law firms committed to helping clients cost-effectively will have a range of fixed-price Initial Consultations to suit most people’s needs in quickly learning what their options are.  At Rainey Collins we have an experienced team who can answer your questions and put you on the right track.

Shaun Cousins and Hanifa Kodirova