Home Wealth Credit and Loans Should ‘Bank of Mum and Dad’ loans be legally binding?

Should ‘Bank of Mum and Dad’ loans be legally binding?

A new challenger bank is serious about parental finance.

Jack Derwin

Digital Journalist, Your Money

$20 billion in ‘loans’ are said to be made from the ‘Bank of Mum and Dad’ every year, with as many as six in ten properties being bought with a contribution from parents.

While the use of that kind of terminology may give an impression of formality, the loans are typically anything but.

One actual bank, Bank First, may be about to change that however as it allows parents and their kids to make these loans legally binding.

“A lot of people go into these arrangements, parents gifting their children money to assist them with buying their first home and it’s all with great intentions but life happens,” customer officer Matthew Ricker told Your Money Live.

“Relationships break down, parents pass away, [and] all these things can happen and there are no real parameters for how these parties deal with it,” he explained.

Bank First wants to fix that.

“Basically what it does is layout for both the contributor, generally the parents, and the borrower, that’s the homebuyer, as to what their responsibilities are, what is being contributed, and what happens in certain circumstances… and also how it gets paid back,” Ricker said.

“Ultimately it’s an agreement between the parties. It’s got absolutely nothing to do with the bank itself. We’re really just providing the service to enable a more clear outcome.”

The terms include how much money is at stake and the proportion that represents of the property purchased.

“If nothing has been done to pay back the loan, then the borrower pays back the contributor the same equivalent share of the property [but] there’s no interest,” Ricker said.

If parents were after a return on their loan portfolio, that would be a detail for the Bank of Mum and Dad to figure out on their own, it seems.

Watch the full interview with Matthew Ricker above.

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