We’ve all had them— clients who are receiving financial assistance from parents when purchasing a home.
Sometimes it is only a smallish amount, i.e. $10,000 – $20,000. At other times, it might be a large six figure amount.
The majority of lenders ask for some form of “gift” letter.
Some lenders have their own template for this, whilst in other cases you might have to prepare one.
I would suggest that in the majority of cases, the parents do expect that the funds will be repaid, although there is seldom a defined time frame within which this is expected to occur.
You may, or may not, be aware that the “gift” is actually something that the parents expect will be repaid. Possibly, if the parents attend the loan interview, you have explained that the lender requires them to sign a “gift” letter as lenders need to know that this is not another commitment that the borrowers need to make regular repayments on. At other times, you simply provide the lender’s letter to the borrowers and ask them to get the donor parents to sign.
Let’s face it. It’s all within the family: What could possibly go wrong?
For ease of explanation, let’s say the parents of Child A lend their child and their partner money to purchase a home. Their child “understands” that the money is to be repaid at some undetermined time in the future. The partner may, or may not, be privy to that information. Let’s also say that the amount gifted is $200,000.
Fast forward a number of years later, and say, for example, the relationship regrettably breaks down.
The home gets sold and the partner seeks to get 50% of the net equity (after repayment of the mortgage).
Child A says, “Hang on, what about the $200,000 that has to be repaid to my parents?”
Partner says, “That money was a gift to us. They even signed a letter confirming it was a gift.”
Child A retorts, “We both know that it was really a loan that we have to repay.”
Partner responds, “Not as far as I am concerned.”
From this point, one of two things will likely happen.
Possibly the donor parents will commence legal action against the partner to recover the extra $100,000 (50% of the $200,000) which, based on recent legal opinion (statute of limitations, the fact that there have been no repayments made, no written agreement), they are unlikely to succeed, or, they front up to the broker because YOU had them sign a “gift” letter.
Right now you are possibly thinking, “OMG, how many of these have I had signed over the years?”
If such a legal case was mounted, I doubt that professional indemnity insurance would come to the rescue.
The above could also be true where the parents have assisted their child, who is single, and there is a relationship breakdown in the future between the parents and that child.
What should you do?
In such situations, when the funds are not a true “gift” (and I insist on written confirmation for my file from the donors if it really is a gift), I insist that the donor(s) and the recipient(s) enter into a formal agreement prepared by a solicitor, acknowledging the debt and all conditions attached thereto. I also explain that all beneficiaries of the financial assistance should receive “independent” legal advice prior to signing such an agreement.
Note that lenders will accept that the funds are not a gift provided there is written confirmation that the debt has no defined repayment term, that there are no regular, or set repayments that must be made, and that the borrowers will only repay the debt when they are in a position to do so, i.e. upon sale of the security. I also have them add a further stipulation that the donors are aware that the lender’s mortgage takes precedence.
The above is not to be construed as legal advice, and every broker, borrower, and donor should obtain their own independent advice from a trusted legal professional in situations when funds are being provided.
Stephen Dinte is a steering committee member with the Independent Finance Brokers Forum. For more information on the group, visit: www.ifbf.com.au.