As Australian property prices continue to rise, more families are choosing to have parents help their children buy a home.
This assistance may include paying the deposit, helping to repay the mortgage or providing a substantial sum directly.
For many parents, the purpose of contributing is to help their child establish a family. At the same time, some parents also consider how to protect their financial interests if family relationships change in the future or other unforeseen circumstances arise.
For that reason, some families wish to define the funds clearly as a ‘loan’ rather than a simple gift, and to document each party’s rights and obligations in advance.
Many people’s first response is: ‘Isn’t it enough to sign a Loan Agreement?’
In practical family asset planning, however, a Loan Agreement alone may not always address every issue that could arise later.
Depending on the family’s circumstances, a professional may also recommend considering another type of legal document: a Binding Financial Agreement.
Why might two agreements be needed, and what is the difference between them?
Loan Agreement: Defining the Nature of the Funds
The central issue addressed by a Loan Agreement is: is the money a loan or a gift?
Where parents help their child buy a home, the parties may have only a verbal understanding: ‘This money will need to be repaid later.’
If a dispute later arises, further evidence may be needed to establish the parties’ true intention at the time.
A formal Loan Agreement will generally specify:
- the amount lent;
- the parties to the loan;
- whether interest is payable;
- the method of repayment;
- when repayment is due;
- what happens if repayment is not made as agreed.
Its principal purpose is to establish that a lending relationship exists between the parties and to record the relevant terms.
If a later dispute arises about the nature of the funds, for example:
- family members understand the money differently;
- the child encounters debt problems;
- the source and nature of the funds must be established;
the Loan Agreement may be an important item of evidence.
Whether the agreement achieves its intended effect will, of course, require an overall assessment of its terms, how it was performed in practice and the relevant legal context.
Binding Financial Agreement: Arrangements Between Partners
If the funds have already been established as a loan, why should the family also consider a Binding Financial Agreement?
The reason is that a Loan Agreement and a Binding Financial Agreement address different issues.
A Loan Agreement concerns the financial relationship between the parents and their child.
A Binding Financial Agreement concerns property arrangements between the partners. For example, the parents may lend funds to help their child purchase a property.
If, several years later, the marriage or de facto relationship between the child and their partner changes, questions about the property interest, responsibility for the debt and the treatment of family assets may arise under family law.
Where Australian legal requirements are met, a Binding Financial Agreement can help the partners agree in advance on aspects of their property arrangements, reducing the risk of a future property dispute.
Why Can One Agreement Not Replace the Other?
This is an issue many families overlook.
In simple terms, a Loan Agreement is principally used to define the lending relationship between the parents and their child and to establish that the funds are a loan rather than a gift.
A Binding Financial Agreement is principally used to address future property arrangements between the partners.
The two documents concern different legal relationships. In some family asset-planning circumstances, a lawyer may therefore recommend considering both types of document to protect the family members’ interests more comprehensively.
Which Families Should Obtain Legal Advice Early?
It will generally be worth consulting a lawyer early where:
- the parents plan to pay the deposit on their child’s home;
- the parents want to make clear that the funds are a loan rather than a gift;
- the child is married or in a de facto relationship;
- the child plans to purchase property jointly with a partner;
- the family has substantial assets and wishes to arrange them in advance;
- overseas assets or a cross-border family situation are involved.
Earlier planning will generally make it easier to define each party’s rights and obligations and reduce unnecessary disputes in the future.
Planning Ahead Matters More Than Resolving a Later Dispute
When buying property, many families focus on the mortgage, stamp duty, title registration and investment returns.
But if family relationships change several years later, they may discover that they did not clarify at the outset:
- whether the money was a gift or a loan;
- whether the parents are entitled to repayment;
- how the property and debt will be treated in the future.
The purpose of legal documents is not to predict that a problem will inevitably arise, but to make each party’s interests and arrangements clearer before one does.
Not every family must sign a Loan Agreement and a Binding Financial Agreement, and no single document can address every issue.
However, where the parents are contributing a substantial sum or the family’s circumstances are complex, obtaining professional legal advice early and understanding the arrangements suited to those circumstances can often help the family reduce future risks and better protect each party’s lawful interests.
