So, your child is all grown up and ready to buy their own home. Exciting times! They could go to a traditional lender to get a mortgage or they might turn to the Bank of Mum and Dad.
As a parent, you want to help your children as much as possible. If you choose to support your children financially in that way, or in another way that involves the advancing of funds for a specific purpose, we encourage you to document such support as either a gift or a loan. This way everyone knows where they stand at the time the advance is made.
Becoming your child's lender can be financially beneficial, but it's also fraught with risk. Your child will be able to save on closing costs, mortgage insurance and interest but it's important you know your child is financially independent before considering lending to them.
If you are loaning funds with the intention of getting them back sometime in the future, we highly recommend that you document this as a loan. While you might provide more favourable terms compared to banks, those terms must be documented at the outset and should include:
- the interest rate (if any)
- repayment time-frame
- conditions and terms of repayment
- details about what will happen to the money if one of the parties dies, or the child and spouse or partner split up
- what will happen if the parent needs the money back
Alternatively, if you are gifting funds with no intention for them to be repaid, we encourage you to document that as a gift, meaning there is no obligation on the recipient to repay you.
Unfortunately, finances and family can at times be a significant cause of conflict, particularly where there is a breakdown in the relationship between the parties. This is why it is important that understandings and agreements are documented at the time funds are provided.