Parental help for first-home buyers
It’s pretty common these days for parents to help kids by way of guarantee, gift or interest-free loan (commonly known as an acknowledgement of debt), but it pays for parents to still seek legal advice around the implications of this help.
Banks will want any ‘loan’ to be interest free and repayment free so as not to get in trouble with Reserve Bank restrictions. That’s where ‘acknowledgement of debt’ documents come in. But parents need to look into what happens if there is a relationship break up or if they pass away. What then happens to the loan or equity and how does that affect any other siblings or estate planning. This makes Will planning and also Trust documentation very important parts of the process for parents.
The kids also need to have an understanding and plan of what happens to any parental loan/acknowledgement of debt should a split occur.
Another important angle is if a guarantee is in place with parents providing security for part of the loan, are the kids fully insured for income loss/mortgage protection should they get sick or disabled and cannot pay the mortgage? This can then put undue pressure on the guarantor.
We always recommend seeking legal advice to ensure everyone is full informed.