Over recent decades, many Australian families have relied on getting money from the " Bank of Mum and Dad " to help with home purchases.
Authors
- Mirella Atherton
Lecturer in Law, University of Newcastle
- Julia Cook
Senior Lecturer in Sociology, University of Newcastle
But our latest research shows there are growing legal risks from that trend.
We spoke to 80 older parents and adult children. Most were from Sydney and had either given or received family money to help with buying a home. Typically, people in our study had provided or received an average of $75,000, though in one case it was $500,000.
We found both the parents and adult children in our study were often unclear whether the money was a gift or loan. Surprisingly few had even written down anything to make that clear.
That lack of clarity and communication has the potential to cause bitter family rifts, elder financial abuse and costly legal battles in the Family Court.
What counts as a gift?
If you're applying for a home loan, many banks require written proof that funds from the "Bank of Mum and Dad" are genuinely a gift - meaning nothing is expected in return.
This is because a parental loan that needs repayments reduces how much the home buyer can actually afford to borrow from the bank.
In our study , some participants were asked to sign gift letters for their children to meet the bank's requirements, even when they viewed the money as a loan. Henry, aged 60, described this scenario:
At the time we had to tell the bank that it was a gift. But in hindsight we said to [our son], 'One day we'd like to see some of that come back to us'. Because it was $50,000 and it's a lot of money to just give away.
Gifts provided to children by their parents have a specific status under Australian law, known as " presumption of advancement ". In the absence of proof, this means funds transferred from a parent to a child, regardless of their age, are most likely to be seen as a gift.
In practice, this puts the burden of proof on parents if they expect any future repayment.
Giving or receiving money can also affect Centrelink payments, so always check that first.
What counts as a loan?
A loan requires repayment of funds under certain terms and conditions. Typically, a loan involves an agreement (verbal or written) between parties. This includes repayment terms, whether interest applies, and a repayment schedule.
Written loans may be informal or formal.
Informal agreement documentation - such as an email or a letter - can help people involved with the loan remember what they agreed to as time passes.
Formal agreement documentation can be drafted by a lawyer. In some cases, it may also be signed and witnessed, with an extra copy held for safe keeping at the lawyer's office.
The distinction between gifts and loans may appear relatively clear-cut. But in practice, this is rarely the case.
In our study, we found the relationship between gifts and loans often got blurred. For instance, loans often turned into gifts over time when repayments stopped being made or requested.
In several cases, parents we spoke to effectively " wrote off " loans (meaning they stopped expecting payments) when their adult children experienced financial hardship, a job loss or became parents.
In many cases, we found the parent and adult child had different understandings of whether the money transferred was a gift or loan.
For instance, Oliver, aged 60, helped his daughter Gianna, 34, with a deposit for a house, saying:
It's more a gift. I don't expect to see any of it back, but I made it clear to her that she had to use it to buy a property.
However, when Gianna was asked about the deposit money, she said:
That's a good question. There's not really any terms on it - no interest or any of that. But I'm going to repay it back. I think that's what they're expecting of it.
We need to talk about money
While conducting this research, we were struck by the lack of communication between family members.
Differing understandings of the funds being a gift or a loan typically resulted from unspoken assumptions.
Most of the participants were reluctant to speak about money, even with close family members. They often felt their arrangements were private family matters that did not need to be discussed with outside parties.
As a result, none of the 80 participants in our study sought professional legal or financial advice.
Very few had documented their agreement in any way, with the majority of money transfers remaining purely verbal.
Is it a gift or loan? Spell it out
To avoid family conflict down the track, we strongly recommend:
having clear and open conversations about gifts or loans
the expectations (or not) of repayment
what would happen if circumstances of either party change
putting all those shared expectations in writing.
We also recommend seeking professional financial and legal advice before transferring money. Although this may appear costly and unnecessary, it can help to avoid financially and emotionally costly consequences.
Free or low-cost legal help is available at community legal centres , while some universities also have legal clinics.
Disclaimer: This article provides general information only and does not take into account your personal objectives, financial situation or needs. It is not intended as financial or legal advice.
Mirella Atherton is also a research fellow for the Financial Integrity Hub, an interdisciplinary research centre based at Macquarie University.
Julia Cook receives funding from the Australian Research Council. She is a member of the Australian Sociological Association and International Sociological Association.
