With high living costs and interest rates, some children are turning to the bank of Mum and Dad to help finance them into their first home. However, Financial Ombudsman, Susan Taylor, is reminding all consumers of the importance of getting legal advice and documenting all agreements when lending to family members.
A recent case investigated by Financial Services Complaints Limited (FSCL), a free Ombudsman and dispute resolution service, 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, had gifted $100,000 to her daughter to help with the house deposit, and gave her an additional $50,000 on the mutual understanding it was a loan and would be paid back. Ling contacted FSCL, after the relationship with her daughter broke down and the daughter refused to pay Ling back claiming there was no loan and that it was a gift.
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 $50,000 she had lost.
In this case, FSCL found that 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. We decided Ling should discontinue 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 Ms 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.”
Ms Taylor says its important family members discuss and understand the terms of the loan from the beginning. “Is it a loan or a gift? Not having these discussions early on and documenting them can negatively impact the relationship later.
“However, with the right advice and written agreements, you can avoid any pitfalls and it can work out well for everyone involved.”
You can read the full case note here.
If people have a problem with a financial service provider, they can make a complaint to FSCL at www.fscl.org.nz, or by calling 0800 347 257.