A family loan should be documented at the time the money changes hands. In Western Australia money passing from a parent to a child is presumed to be a gift, so if you want it back, a written agreement is essential as it proves it was a loan.
Why have a written agreement?
If you’re borrowing or lending money, particularly where family or friends are involved, it always makes sense to formalise your agreement. A properly drafted agreement protects your rights and helps prevent a disagreement or a relationship breakdown.
The conversation feels awkward, but it’s considerably less awkward than the one that happens in the Family Court a decade later. See Estate planning trap no. 6 – lending money to children.
What sort of document do you need?
There are different ways to formalise your loan. Which is right for you depends on how much is involved and how complicated the arrangement is.
For very straightforward matters, a simple Deed of Acknowledgment of Debt will formalise the obligation to repay. Security can be added if required, for example a charge supported by a caveat over the borrower’s real estate.
For anything else, it’s better to record the transaction in a comprehensive loan agreement with security documents in the form of a mortgage or caveat over the borrower’s real estate.
A mortgage or caveat registered against the title puts the world on notice that you have an interest in the property and it survives a separation or a bankruptcy in a way a handshake doesn’t.
We offer fixed prices for these services. Get in touch if you need help with preparing a loan agreement.
What should you think about before lending?
Work through each of these before the money changes hands:
- the loan amount (known as the principal);
- the manner of repayment of the principal;
- interest charges;
- payment of interest;
- the consequences of the borrower’s default; and
- security for the borrower’s promises, such as a mortgage, charge or guarantee.
Where the money is going towards a property your child owns with a partner, decide whether that partner is a party to the agreement – i.e. are you lending the money to your child only, or to your child and their partner.
You should also consider what happens if you die before the loan is repaid. An unrepaid loan is an asset of your estate, but you can forgive it in your Will or count it as part of that child’s share so your other beneficiaries don’t recieve a lesser amount.
I’m guaranteeing a loan and have been asked to obtain legal advice
If you’re borrowing money or guaranteeing a loan and need independent legal advice on documents prepared by a bank or other lender, we can help.
Lenders usually require a guarantor to get advice from a lawyer who doesn’t act for the borrower and to produce a signed certificate confirming it. The point of the exercise is to make sure you understand what you’re taking on, because a guarantor who signs without advice has a much harder time arguing about it later.
Guaranteeing your child’s mortgage means the lender can come after you if they default. It’s a decision worth making with your eyes open.
Frequently asked questions
Is money I give my child a loan or a gift?
A gift, unless you can prove you intended a loan. The presumption runs against the parent, which is why having a clearly written agreement is essential.
Do I have to charge interest?
No. An interest-free loan is perfectly valid. What matters is that the agreement says so, rather than leaving it to be argued about later.
Can I document a loan I made years ago?
You can record an acknowledgment of the debt now and it’s better than nothing, though it carries less weight than a document made at the time.
Get the loan documented properly
We prepare deeds of acknowledgment, loan agreements, mortgages and caveats at fixed prices and we advise guarantors who need independent legal advice.
Get in touch or call us on (08) 9220 4444.
This article is general information and not legal advice.
