This week’s column highlights how to avoid dangers relating to loans to children. Sue and David are really excited by the news that their daughter Joanne is getting married to James and the wedding will be in six months time.
Joanne says that she and James want to buy a home together and unfortunately she and James do not have enough money to pay the deposit on their new home without avoiding a requirement of the bank to take out mortgage insurance on the loan to protect the bank in case of default by Joanne and James. Joanne and James are told that the mortgage insurance will be $8,000.00.
So Sue and David decide to help Joanne and James with their purchase by drawing out some of their savings in the amount of $40,000.00 which will avoid the high mortgage insurance premium. They hear from a friend that any advance like this should be evidenced in writing.
Consequently Sue and David see their solicitor who says the advance should be written up as a loan repayable on demand and secured by a second mortgage. They accept this advice and the documentation is prepared. David and Sue decide not to register the second mortgage because of potential difficulties with the bank.
Unfortunately after four years Joanne separates from James after some differences and James asks for a property settlement. James tells his solicitor that the payment of $40,000.00 by Sue and David was a gift and is not repayable.
Fortunately for Sue and David they had the loan evidenced in writing and secured by a second mortgage (even though it was not registered), and were able to recover the $40,000.00 upon the sale of the home after Joanne and James work out a property settlement under the Family Law Act.
A further benefit is that if Joanne or James were to encounter financial difficulties, and were declared bankrupt at any stage, then Sue and David would receive protection as secured creditors.
Your individual circumstances may differ and accordingly, this column cannot be relied upon as legal advice.
