As a Loan

While you may have complete confidence in your child's ability to repay the loan without the necessity of a formal loan agreement or mortgage, this assurance may not be sufficient to adequately protect your hard-earned funds.

The money you lend could still be jeopardised in similar circumstances as those outlined in the gift section mentioned above.

It is essential to remain vigilant and consider the potential pitfalls. Below are some thoughtful recommendations and notable risks to take into consideration:

The loan agreement should be in writing and signed by all the people to the agreement after each person has received independent legal advice.

• Everyone may agree to the arrangement and be trusted to repay at the time the agreement is being discussed. With time however, memories can fade, and the detail of the arrangement may be forgotten or incorrectly remembered.

• Circumstance too can change and even the strongest of familial relationships can break down — we cannot always know what the future holds.

• It may also be important at a future time to prove to banks, a trustee in bankruptcy, creditors, Centrelink, your child’s future partner or the Family Court what the arrangements were.

Timing

The loan should be secured against the property.

• A first mortgage is the best form of security as it means the property cannot be sold without first addressing your interest in the property. Other interests can still be registered against the title, sometimes without your knowledge or consent, but as a general proposition your mortgage will take priority.

• In most cases, your child will have a first mortgage with a bank, in which case a second mortgage will be the next best security. This means that if the property is sold, the first mortgage, including interest and costs, will be paid first. If there is any money left from the sale your loan will then be repaid.

• It is important to understand how much money is owed under the first mortgage and what ability your child has to increase those borrowings. This will tell you how much equity there will be in the property to pay your loan if the property is sold.

• It is important that any mortgage is registered on the title. While in some instances registering a caveat based on an unregistered mortgage is possible, it is not the best way to protect your position.

• If you do lodge a caveat over the property this acts as a notice on the title telling the world you have an interest in the property. The right to do this must be conferred by way of an unregistered mortgage or a statement in the loan agreement providing a charge over the property. The right to lodge a caveat does not automatically happen just because you lent your child money. A caveat does not give you the right to sell the property to recover your loan money without having to first go to court to obtain an order for sale.

• We can discuss with you what is involved in lodging a mortgage or a caveat and how much it will cost.

What happens to the loan if you die?

What if the property is owned by your child and their spouse or domestic partner?

• If the property used as security for your loan is owned by both your child and their spouse or domestic partner, then the loan agreement and mortgage should be signed by both owners.

• This means you can lodge a mortgage over the whole of the security property.

• It also makes it easier to enforce the mortgage if you need to, especially if your child dies leaving the property in their partner’s name.

• Registering and enforcing a mortgage over only your child’s share of the property can be a difficult and costly process.

You should think about what you want to happen to the loan if you die before it is paid back. You may need to amend your will to address this issue. You can read more about our estate planning services here.

You should not advance the money until both the loan agreement and the mortgage are properly signed and finalised. Additionally, the timing of seeking professional advice and preparing the loan agreement is crucial and should not be overlooked.

It is important to avoid leaving the discussion and preparation of a loan agreement and mortgage until the last possible moment. By doing so, you will allow ample time for your child and their partner to obtain independent advice regarding all the terms of the loan.

This thoughtful approach will ensure that there are no unnecessary delays in the settlement of their upcoming property purchase.