The choice between giving a loan or gift when transferring property or money to a family member in Australia can depend on various factors, including the parties’ financial circumstances, the intended purpose, and potential tax and legal implications.
Our family lawyers will explain how the courts will interpret the difference between a loan or a gift.
Loan or Gift?
What is a Gift?
A gift in the legal context is a transfer of money or property without expecting repayment.
As mentioned earlier, gifting property in Australia could have potential implications for Capital Gains Tax, Stamp Duty, Centrelink payments, bankruptcy protections, and family law property settlements and inheritances.
What is a Loan?
A loan is money or property given to another party in exchange for future repayment of the loan value amount with or without interest.
The terms of a loan are agreed to by each party before any money or property changes hands.
What Are the Disadvantages of Using Parents’ Money to Purchase a Property in Australia?
Loan or gift? Using parents’ money to help purchase a property in Australia, often called the “Bank of Mum and Dad“, can have several potential disadvantages. Loan or gift? Here are a few to consider:
- Financial Risk for Parents: If parents gift or loan money, they might be vulnerable if their financial circumstances change. They may need that money for retirement, health care, or other unexpected expenses. If the money is loaned and the child cannot repay it, this could create further financial difficulties.
- Relationship Strain: Mixing family and finances can put a strain on relationships. If repayments on a loan can’t be met, or if there’s a disagreement about the property, it can lead to tension or disputes within the family.
- Lack of Financial Independence: For the child, relying on parents for financial help might delay the development of financial independence and personal financial management skills.
- Potential Legal Complications: A loan agreement that needs to be formalised could lead to legal issues later. For instance, if the parents need to prove the money was a loan and not a gift, or if the child goes through a separation or divorce and the property’s ownership is disputed.
- Tax Implications: Depending on the circumstances, tax implications can be associated with gifting or loaning money for a property purchase. For example, if parents consider investing in property rather than merely lending money, they may have to pay Capital Gains Tax.
- Impact on Government Benefits: If the parents receive government benefits, gifting a large sum of money could affect their eligibility.
- Estate Planning Complications: If parents help one child buy a property but can’t afford to do the same for their other children, it may create feelings of inequality, leading to disputes over the parents’ wills later on.
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What Are the Advantages of Using the Bank of Mum and Dad When Purchasing a Property?
Loan or gift? There are several potential advantages to using the “Bank of Mum and Dad” when purchasing a property in Australia:
Ability to Enter the Property Market Sooner: In Australia’s often high-priced property market, saving for a down payment can take significant time. Financial help from parents can allow a person to purchase a property earlier than they could have on their own.
Possibility of Lower Interest Rates: If parents provide a loan, they offer a lower interest rate than a traditional financial institution, reducing the overall cost of the loan.
Avoiding Lenders Mortgage Insurance (LMI): If parents contribute enough to help their children meet at least a 20% deposit on a home loan, this can eliminate the need for Lenders Mortgage Insurance, which lenders typically require if the borrower’s deposit is less than 20%. LMI protects the lender if the borrower can’t repay the loan.
Flexibility: Family loans or gifts can come with more flexible terms compared to traditional bank loans. For example, parents might offer more flexible repayment schedules or even the possibility of deferring loan repayments if the child faces financial difficulties.
Potential for Better Property: With the help of the “Bank of Mum and Dad”, a person might be able to afford a larger property, a property in a better location, or a property in better condition.
Reducing Financial Stress: Financial assistance from parents can ease the burden of saving for a deposit, reducing the financial stress for first-home buyers.
Helping to Build Equity: Getting into the property market earlier can also allow the person to start building equity in their property sooner.
What are the Terms and Conditions of Loans that Gifts Don’t Have?
Loan or gift? In a legal context, some specific terms and conditions are typically associated with a loan but do not apply to a gift. Here are some of these critical loan-specific terms:
Principal: This refers to the original amount of money that is being lent.
Interest: This is the cost of borrowing money, calculated as a percentage of the principal amount. A gift does not accrue interest.
Repayment Schedule: A loan agreement will stipulate how and when the loan should be repaid. There is no expectation of repayment with a gift.
Term: This is the period over which the loan must be repaid.
Default: If the borrower fails to repay the loan according to the agreed-upon terms, they are said to be in default. Consequences for default will also be specified in the loan agreement. In contrast, a gift does not need to be repaid, so there is no possibility of default.
Security or Collateral: In some cases, a loan may be “secured” by an asset, meaning that if the borrower cannot repay the loan, the lender has the right to take the asset. A gift does not involve collateral.
Guarantor: A guarantor is a third party who agrees to repay the loan if the borrower cannot. This term does not apply to gifts.
Early Repayment or Prepayment: Some loan agreements may have terms related to repaying the loan earlier than the agreed term, including any penalties or discounts. This does not apply to gifts, as there is no obligation for repayment.
Loan or Gift: Which is Better When Buying a Property in Australia?
The team at Walker Pender Group is here to help. Whether you’re a parent considering lending money to your child or facing a property settlement where a family gift or loan is in question, we have the expertise you need.
Don’t let the complexities of gift or loan family law keep you guessing. Reach out to Walker Pender Group today – for clarity, peace of mind, and the best possible outcome.
