Avoiding The Risks of Family Loans

Tuesday, April 17th, 2018

Recent news reports in Melbourne’s media have made their way into overseas newspapers and online publications, after details about a Melbourne woman suing her architect son over a $500,000 home loan hit the headlines.

The story is the latest case in what many experts believe is a rising trend, as a growing number of parents trying to do the right thing for the children and family members by lending them money to help them get a foothold on the property ladder.

Since the start of 2018, County Court judges in Victoria have handed down two judgements that ruled in favour of parents who were in disputes with their adult children – and there are set to be more clogging the court system in the years to come. At the heart of the cases is the same issue – parents doing battle with adult children over whether money shared to help fund property purchases was a gift or a loan that was meant to be paid back.

Australian legal experts report that mothers and fathers lending money to adult children, with a well-meaning view to help them finance the deposit needed to secure mortgage finance, can often spiral into messy financial disputes that lead to splits in families – and costly legal fights.

The media reports quoted David McKenzie, co-chair of the Law Institute of Victoria’s property law committee, saying that, while he was likely to see just one case per year five years ago, he has already handled a few in the first few months of 2018 alone.

The judgement featured involved Lalanah Brujah, described as a retired mother of three, who  took her eldest son, Taras Wolf, to court to recover a debt of $289,800 – an amount she claimed was the overdue balance of a loan.

In this case, the court heard that Ms Brujah had written cheques to cover the deposit, stamp duty and settlement payment, for her son’s property purchase – a property in the inner-city suburb of Collingwood that Mr Wolf bought for $500,000 in 2001. At the time, Mr Wolf was in his late 20s and his mother was doing what she thought was right to help her adult son start the journey towards home ownership – giving her son access to money to help fulfil lending criteria that requires a substantial deposit and additional fees covered. And she’s not alone. In fact, in today’s dynamic property market, it’s estimated that as many as one-third of first-home buyers turn to their parents for much-needed financial backing to help them buy a house.

According to Ms Brujah’s testimony, she told her son she could lend him the money and he could pay her back. She added that her expectation was that she would receive that payment in full within around five – seven years.

In his defence, Mr Wolf claimed the money from his mother was a gift, and he insisted there was “no discussion of payments” and “there was no loan”.

The Collingwood property at the centre of the dispute was actually sold by Mr Wolf 18 months after he bought it and he bought another property in Chadstone, which then became the site for an award-winning design and renovation on a luxurious five-bedroom property for his own family.

In his findings, handed down in March, 2018, Judge Woodward ordered Mr Wolf to pay his mother $289,800, with interest and legal costs to be calculated at a later date. It’s a finding that shows justice will be done in terms of recouping her money but, of course, it’s hard to imagine that family patching up their personal differences – a very sad outcome for any family.

The case is an important reminder for all family members considering offering financial assistance to another family member to take the necessary legal steps to ensure the agreement is understood between all involved parties – and even, then, understand the risk that, if something does go wrong, recovering loan money can be tricky because the first priority is always the registered mortgage debt (with a bank or lending institution).

Using a mortgage broking specialist and professional legal advice to draw up a mortgage or caveat to place over the property being funded is one way to protect your financial support and help avoid family conflict in the future.

For more information about the role you can play in helping your family members get a loan, talk to our specialists at Loans Actually today.

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