Dos and don'ts of lending money to family
As house prices continued to soar, Australians wanting to enter the property market have reportedly turned to family members to help secure home loans, with the “Bank of Mum and Dad” now Australia’s ninth largest lender.
ABC reported research from Digital Finance Analytics revealed the number of people getting help from family to get into the property market was at record levels, with 60 percent of first home buyers receiving financial help from parents in the first quarter of 2021.
The research also revealed a worrying statistic, with borrowers who received a cash gift from parents to aid in buying a property three times more likely to default on their loan in the first five years.
RACQ spokesperson Lucinda Ross warned Queenslanders planning to accept or offer assistance to a family member buying a property to take the emotions out of the transaction and treat it as a business arrangement.
“If you plan to borrow money from a family member to buy a home, make sure you know exactly what the arrangement is,” Ms Ross said.
“The same applies if you’re the one lending the money.
“Make sure all parties know whether it’s a gift or a loan, the repayment plan in relation to timeframes and amounts, and what happens if either party needs to end the arrangement for any reason.
“Don’t let the excitement of a new family home end in a disaster.”
Tips for family lending situations:
• Take the emotions out of the transaction and treat it as a business deal
• Really consider if you should be lending/borrowing from this person
• Make clear guidelines around repayments including amounts, timeframes and how the payment will be made – write it down like a contract
• Discuss what happens if either party needs to terminate the contract early for any reason
• Be willing to know you may never get the money paid back
• Never lend out money you need yourself - think of your own financial wellbeing first. And never borrow money you know you can’t pay back
• Be mindful that the person may not use the money for what they told you they’re borrowing it for – how will this make you feel and would you be OK with that?
• Look into any tax implications.
The information in this article has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained in the document is general advice and does not take into account any person's particular investment objectives, financial situation or needs. Before acting on anything based on this advice you should consider its appropriateness to you, having regard to your objectives, financial situations and needs.