21 Sep 2011Let’s face it, finding the money to buy your own property can be tough. Property prices these days are steep and getting a loan can be difficult. Getting a little help from family to enter the property market often makes sense.
But sometimes the finer details of deals worked out over the kitchen table can be overlooked down the track.
Consider this – a dad lends his daughter $200K to buy a property. No formal mortgage document is drawn up and while they’ve discussed a repayment plan, nothing is written down. She’s family after all.
So she buys a property and the agreed-upon monthly repayments begin. No problem. But then she takes up with a new partner, who’s in financial strife, and the repayments stop. Unfortunately Dad’s in no legal position to demand his money. What’s even worse, the partner may be able to claim an interest in the property if his relationship with the daughter breaks up – so dad has financed the partner as well!
But there are steps he could have taken to protect himself. As a basic measure he could have had an unregistered mortgage drawn up, meaning the details of the loan are formally recorded but not actually registered against the title (which could also save having to pay stamp duty). Another protection is to lodge a caveat on the title. Generally a property cannot be further encumbered by bank loans or sold until a caveat is removed.
To avoid relationships being irreparably damaged though, it’s an excellent idea for anyone doing a family deal over property to draw up a written agreement from the start, covering all of the relevant “what-ifs” and how they’ll be dealt with. For example, is there a monthly repayment plan? Or a time by which the parent will be paid out in full? Will interest be paid? If the property doubles in value and the kid wants to sell, does the parent get back double what they lent? Does the parent get a say in renovation plans, or choosing a tenant?
Parents who go “guarantor” for their kids on a home loan can also find themselves in strife when, unbeknownst to them, their kid gets into financial hardship. Having a parental guarantee basically means the bank will lend more than they otherwise would, confident that if the kid defaults on the loan, they can hit up the parent for the debt.
Having a written agreement that said the parent could access the kid’s financial statements, would mean they’d have some warning if things were going off-course. They could then plan a strategy together, as a family.
The message is this; put something on paper. Not ironing out some of the finer details can be a recipe for familial disaster.
For more information, please see Gifts and loans to family members.
