Beware the Bank of Mum and Dad… or the Bank of Siblings?

By |2022-06-29T09:54:15+10:0017-5-22|

It’s becoming more common for parents to assist their kids with home ownership objectives – it is after all the great Australian dream isn’t it? There’s plenty of media coverage about the aspiration of home ownership becoming a mirage to younger generations, with prices sky-rocketing and interest rates now on the rise. The loans are usually from parents to a child, but not always. The Supreme Court handed down a decision last month, about funding arrangements between siblings involving a house in Cairns.

The case

Andrew and his wife and kids lived with Andrew’s mum. That arrangement became ‘uncomfortable’ and everyone agreed that they needed a house of their own. Alas, they couldn’t raise their own funds to buy a house, so Andrew’s sister Karen, along with her husband, agreed to lend them some money. The arrangement was purely oral.

The loan arrangement

  • Karen and her husband borrowed money from a bank and purchased the house. The property was owned in their names;
  • Andrew and Karen’s mum loaned some money to Andrew and his wife, which also went towards the purchase;
  • Andrew moved into the house with his wife and children;
  • 7 years later the house was sold. They couldn’t agree on who was entitled to the profit, so off to court they went!

There was substantial disagreement about what the terms of the original arrangement were. At the trial, the judge had to determine what that arrangement was, based on the evidence of both parties.

The decision

The judge decided that:

  • Andrew and his wife would borrow the deposit from Andrew’s mum;
  • Karen and her husband would buy the property, and obtain finance from a bank to cover the price, duty and associated legal costs – the ‘bank loan’;
  • Andrew and his wife would make the repayments on the bank loan, and also pay all rates, insurances, and maintenance as a normal home owner would;
  • Andrew, his wife and their children would occupy the property;
  • When Andrew and his wife were in a position to obtain finance, they would pay out the remaining bank loan, and the title to the property would be transferred from Karen and her husband, to Andrew and his wife.

The problem was that Karen and her husband wanted to be discharged from the bank loan so they could borrow money for other purposes. Andrew and his wife did not obtain a loan to pay out the original bank loan, which resulted in Karen and her husband selling the house.

So what went wrong?

Well, it probably wouldn’t have ended up in court if they’d written down the arrangement at the outset. When circumstances change or the terms are simply forgotten, it is too easy for a party to try to reconstruct the deal in their favour if there are no clear written terms.

It’s even more important where family is concerned to avoid the failure of personal relationships. Make sure that the arrangement is recorded and that it resembles an arm’s length balanced deal to avoid a dispute over money – which is what it ultimately became of this case.

Get advice! If Andrew, Karen and their spouses had sought advice from independent law firms, and treated it sensibly rather than as an IOU, then it would probably have never ended up in court.

Nick Prove and our team of experienced solicitors are ready and able to assist. Contact us today.

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