Budget Buster: The 'Bank of Mum and Dad' needs to toughen up
"We are not a bank."
Those are the pleading words of Marian Warin, the retiree who took her daughter to court this month over an unpaid $367,000 loan.
Marian's right. She and her husband Trevor are certainly not a bank. A bank would never enter into a verbal agreement. When a loan falls due, a bank would get its money, one way or another. Failing marriage? Too bad – pay me. Tough times? Too bad – pay me. Can't pay? We're taking your house. The Warins sued as a last resort, some 20 years after the borrowing began. A bank wouldn't hesitate to take action immediately.
The "Bank of Mum and Dad" is popular all across the land, because the staff are invariably a bunch of softies. What sort of bank manager offers a piping hot scone along with a no-questions-asked interest-free loan? Where else would you find a loan officer who says 'don't worry, dear' in response to a missed payment – or writes the debt off altogether?
I'm scared we're going to see a bumper crop of cases like the Warins' in the years to come. Rocketing property prices are putting the Bank of Mum and Dad under enormous pressure. Mortgage brokers report that almost every first-home buyer ropes their folks into helping them get over the line, and it's often more than just a cash contribution. Parents are increasingly borrowing against their own property so their beloved offspring can get a foot on the ladder.
Conditions are perfect for an outbreak of heartache, family feuds, and ruined relationships, but hopefully we can nip it in the bud. Here are five golden considerations for lending to family:
1. What's the money for?
You have every right to know why your son or daughter needs a loan. If they won't say, you might be enabling harmful behaviour. Don't feel uncomfortable to stick your beak in - by the very act of asking for a loan, they're opening themselves up to scrutiny.
2. Is it a gift, or an interest-free loan?
If you're deep-pocketed enough not to need the cash back, a gift is simpler. However, Squirrel Mortgages says most parents prefer to give interest-free loans, because a cash deposit would become 'relationship property' to be divvied up if your kid's relationship fails.
3. Put it in writing
When verbal agreements go to court, they become a he-said/she-said battle, which is why no-one in the business world does anything without a contract. The more formal the agreement, the better - Squirrel has a deed of debt template you can fill out and use with the banks, for example. The biggest advantage of a written agreement is that it makes sure everyone's on the same page, which can stop misunderstandings arising in the first place.
4. Be specific
At the minimum, the agreement needs to cover off whether the loan is repaid in instalments or all at once, the date or dates it falls due, the interest rate (if any), and what happens if the borrower can't pay.
5. Take advice
Parents come under a lot of pressure to support their children, which can cross the line to elder abuse. Rather than agreeing to a loan on the spot, at least stall for time so you can talk to someone like Age Concern, the Citizens Advice Bureau, your lawyer, or a trusted friend.
Marian Warin told her story as a warning to other Kiwis. She and Trevor grew and picked fruit for decades to build up a solid nest-egg, only to have to scratch out their retirement years on pensions. Her husband is now suffering from dementia. Her daughter has trespassed her son, who pleaded with her to repay the loan.
"Terrible, it's all terrible," Marian says. I couldn't agree more, and my heart goes out to her. Let's learn from the sad saga of the Warin family, and make sure we never repeat it.
- Sunday News