Media reports indicate that a fast-growing financial support system has emerged out of necessity to assist a large portion of property buyers in Australia. Commonly referred to as the Bank of Mum and Dad or BOMAD, this informal institution plays a significant role in helping many Australians enter the property market.
Without the BOMAD, many current homeowners would not have been able to enter the rising property market.
What differs between the BOMAD and licensed financial institutions is obviously the terms attached to the finance provided.
Financial institutions are in the business to provide finance to make a profit, whereas the BOMAD are driven by love and affection and a strong desire to see their family members advance and prosper.
However, there are considerations that the BOMAD should carefully take into account when making financial assistance available to their loved ones.
Is it intended as a gift or a loan?
Generally, if the finance is not documented as a loan, then it will be considered a gift pursuant to the legal principle of the doctrine or presumption of advancement.
If it is to be a loan, and given the familial relationship between the parties, the written terms are usually very brief. A common trap is a loan repayable on demand. For this type of loan, the statute of limitations (in this case, six years) runs from the time the loan is made unless there is an acknowledgement of the loan or a payment in reduction of the debt is made within that six year period, which re-starts the six year clock.
Care should also be taken when advancing to a family member and his or her partner. If not properly protected, the money, or a portion of it, could be lost in an asset split on the breakdown of the relationship or could be used to pay creditors on the bankruptcy of the property owner or owners.
Your estate planning may also be impacted. Upon your death, your executor may be compelled to recover the funds for the benefit of your estate and its beneficiaries if the circumstances of the loan were not properly taken into account and provided for in your estate planning. This could result in your family member being forced to sell the property to repay the loan to your estate.
These are some of the considerations that need to be taken into account when an application for finance is made to the BOMAD. We strongly recommend that legal advice be taken so that unwanted issues do not arise further down the track when the only intention was to provide financial assistance for a particular purpose on favourable terms.
If you have any queries, please contact us for assistance.
