Cracks in 'Bank of Mum and Dad'

Are cracks appearing in the ‘Bank of Mum and Dad’?

A Melbourne mother has sued her son over what she said was an unpaid home loan and legal experts say the frequency of such actions are becoming far more common.

As well-meaning parents seek to help their adult children enter competitive property markets, what can be overlooked is what happens when they need that money and the child is not in a situation to repay it.

The financial services royal commission in Melbourne last week also heard how older Australians were being adversely affected by irresponsible lending.

In the Melbourne Magistrate’s Court last week, a woman was seeking $289,800, which she claimed was the outstanding balance of a loan to her architect son to buy a house in Collingwood in 2001.

The son claimed the money was a gift. However, the court ordered him to repay the full amount sought.

David McKenzie, co-chair of the Law Institute of Victoria’s property law committee, told domain.com.au that parents contemplating loaning money to children should draw up a mortgage or caveat to place over a property, or set up a discretionary trust, though he conceded that could be an expensive process.

“At the end of the day, parents have a natural desire to help their kids,” he told the website, but warned that even with a formal agreement, recovering loan money could prove tricky because a registered mortgage (with a bank or lender) would take legal priority.

“Five years ago, you’d get maybe one (court action) a year,” he said. “This year, I would have handled at least three or four – and we’re only in March.

“The terrible thing about these things is if mum and dad are getting on and are near the retirement phase, they will effectively be putting money out of their pension pool into this property. The idea that that could be at risk and affect the parents later on is also a pretty horrifying prospect.”

Karen Cox, of the Financial Rights Legal Centre, noted at the royal commission last week that such loans are: “Outright exploitative … elderly persons [are] left in dire circumstances as a result of a loan for which they’ve seen absolutely no benefit.”

Eileen Webb, a professor at Curtin Law School at Curtin University, told The Conversation that in extreme cases, older people had been told they would be unable to see their grandchildren if they did not enter into loans.

She said elderly people should be fully informed of their obligations and the potential consequences should a transaction go wrong and that the banks could lead the way on this.

“One initiative would be for the banks to contribute to legal and financial advice for older people, or subsidise the provision of such advice at community legal centres,” she said.

“Loan assessors and brokers must also be made aware of the risks of such transactions.”

She said that the Australian Bankers Association was introducing enhanced measures to address elder financial abuse and the risks associated with such loans. But she added that the Government should consider tougher penalties against credit providers who disregarded responsible lending obligations.

Have you lent children money to buy housing? Did you have a formal legal arrangement?

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Written by Janelle Ward

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