The financial ombudsman is warning parents about helping their children buy their first home after a mother lost $50,000 when her relationship with her daughter broke down.
With the cost of living crisis hitting people hard, some children are turning to the bank of mum and dad to help finance them into their first home.
But financial ombudsman Susan Taylor released a statement on Wednesday urging all parents to know about the importance of getting legal advice and documenting all agreements when lending to family members.
It comes after a recent case investigated by Financial Complaints Limited (FSCL), saw a mother lose $50,000 she loaned to her daughter to help purchase a property they planned to live in together because the loan was not agreed to in writing.
Ling*, who was in her 70s, gifted her daughter $100,000 to help with the house deposit, while also giving her an additional $50,000 on the mutual understanding it was a loan and would be paid back.
But things took a turn for the worse and Ling contacted FSCL after the relationship with her daughter broke down.
Ling's daughter refused to pay her back claiming there was no loan and the $50,000 was a gift.
But Ling said the mortgage broker they had used to help assist them with obtaining a bank loan to pay for the rest of the house had failed to prepare the appropriate paperwork documenting the extra $50,000 as a loan. Ling wanted compensation for the money she had lost.
FSCL found Ling had received sufficient legal advice when buying the house to inform her of the importance of a loan agreement with her daughter and she had opted not to have one drawn up.
Taylor said the FSCL decided Ling should drop her complaint.
"Generally, if you are loaning money to a family member, it is of utmost importance to protect yourself and your assets, both now and in the future, by getting independent legal advice and always making sure all agreements are documented - even if it is parents lending to their own children," explains Taylor.
"You also shouldn't expect a financial adviser to draw up legal documents as it is not within their area of expertise.
"There can be a reluctance to formally document family lending arrangements. If you think this couldn't happen to you - so did Ling. This was a sad case highlighting the risk of parents lending their children money on the mutual understanding the loan would be repaid."
Taylor said it's important family members discuss and understand the terms of the loan from the beginning, making it clear whether it's "a loan or a gift?"
By not having these discussions early on and documenting them can negatively impact the relationship later, Taylor said.
"However, with the right advice and written agreements, you can avoid any pitfalls and it can work out well for everyone involved." She said.
*Not Ling's real name.
