Putting pen to paper when loaning funds to children

Have you considered loaning funds to your adult children for their first home?

Often parents will consider lending funds to their adult child before their child buys their first or second home.

At this stage, generally the relationship between all parties is amicable and it may not be front of mind to enter into written terms outlining the nature of the loan.

Years down the track, relationships may sour or circumstances may change. One party may misremember the terms of the loan or argue that it was a gift. It then quickly becomes clear why it is imperative to enter into a written agreement to document the terms of your loan at the time that the funds were first advanced. Having a clear agreement which outlines the terms of a loan allows you to have a document to rely on when seeking repayment.

A well-drafted loan agreement can grant you protection and recourse if your child does not willingly make repayments.

A loan agreement can offer you the following protections:

Security over collateral

A loan agreement can expressly grant you the ability to register a mortgage or caveat over your child’s property. This will mean that the property cannot be sold without your consent and allows you an avenue to seek repayment prior to or simultaneously with the sale of the property.

Outlining terms of repayment

A loan agreement can detail specific timeframes for repayment to be made, such as the first of every month or detail specific events which will require immediate repayment, such as the death of the lender. Payment to the lender’s deceased estate or the loan otherwise being offset from the child’s share of the estate will ensure fairness amongst any siblings.

The agreement can also outline the consequences of non-payment, such as default interest or the ability to seek a default judgement order from the appropriate Court.

Interest

The agreement can provide terms that the borrower is to pay interest and outline the amount of interest.

Funds

The agreement can clearly determine that the funds are a loan, not a gift. This will afford you opportunity to recover the funds should your child separate from their partner or is declared bankrupt.

Children who receive loans or gifts from their parents should also obtain family law advice and consider entering into financial agreements with their partners.

Ultimately, a loan agreement can be tailored to your personal circumstances to ensure that it accurately reflects your needs and protects you from relevant risks.

If you are contemplating lending funds to a child to purchase property, please contact the team at Scanlan Carroll.