The “Bank of Mum and Dad” – Loan vs. Gift vs. Co-Ownership

The “Bank of Mum and Dad” – Loan vs. Gift vs. Co-Ownership

It is a scenario we see almost daily at Spot On Conveyancing. You have worked hard to build your wealth, and now you want to help your adult child get a foothold in the Queensland property market. But there is a nagging worry in the back of your mind: What happens to my money if my child and their partner break up?

It is not cynical; it is prudent. The “Bank of Mum and Dad” is now one of Australia’s biggest lenders, but unlike a commercial bank, parents often lend hundreds of thousands of dollars on a “handshake.”

If you are funding your child’s entry into the market, you generally have three legal pathways: a Gift, a Loan, or Co-Ownership. Choosing the wrong one could mean your hard-earned money ends up in the hands of your child’s ex-partner.

The Scenario: Helping Without Losing Control

Imagine you give your daughter and her husband $100,000 to help with a deposit on a home in Brisbane. Three years later, they separate.

If that money was not properly documented, the Family Court will likely view it as a gift to the couple. It becomes part of the shared asset pool, meaning the ex-husband could walk away with $50,000 of your money.

The “Gift” Risk: Why a Gift Letter is Permanent

When your child applies for a mortgage, their bank will often demand a “Gifted Deposit Letter.”

Banks love these letters because they absolve the bank of risk. By signing a Gift Letter, you are legally declaring that the money is a non-repayable gift. You are telling the bank (and effectively the courts) that you have no interest in the property and no right to ask for the money back.

The Risk:

• Irrevocable: You cannot later claim it was a loan just because they got divorced.
• Asset Pool: In a divorce, the full amount is considered an asset of the couple, available for division.

If your priority is helping your child get a loan approval, a gift letter is easy. But if your priority is protecting assets from divorce, it is the most dangerous option.

The “Loan” Solution: Becoming a Secured Creditor

The most robust way to protect your contribution is to formalise it as a loan agreement family arrangement. This involves signing a formal contract that sets out the loan amount, interest rate (even if 0%), and repayment terms (e.g., “repayable upon demand” or “repayable if the property is sold”).

However, a piece of paper often isn’t enough. To truly protect the money, you must secure the loan against the property.

1. Registering a Mortgage

You can register a second mortgage over your child’s property (behind the bank’s first mortgage).

• Pros: This is the strongest form of security. If the house is sold, the bank gets paid first, and you get paid second—before the couple gets any profit to split.
• Cons: The child’s main bank (the first mortgagee) must agree to this, which they sometimes refuse to do.

2. Lodging a Caveat

A caveat is a formal notice lodged with Titles Queensland that tells the world you have an “interest” in the property.

• How it works: A properly drafted loan agreement can grant you the right to lodge a caveat. This prevents the property from being sold or transferred without your consent (and without you getting paid back).
• Strategy: This is often a preferred “middle ground” for parents. It signals to any future family lawyers that there is a registered debt owed to the parents that must be cleared before the asset pool is divided.

Co-Ownership Options: Being on the Title

If you are contributing a significant percentage of the purchase price, you might prefer to be a registered owner alongside your child. In Queensland, there are two distinct ways to co-own land.

Joint Tenants (The “Survivorship” Rule)

In a Joint Tenancy, everyone owns the whole property together. There are no distinct shares.

• The Critical Factor: If one owner dies, their interest automatically passes to the surviving owners. It cannot be left in a Will.
• Verdict: This is usually suitable for spouses, but rarely for parent-child arrangements, as you likely want your share to go to your other children or spouse if you pass away, not automatically to your child (and potentially their partner).

Tenants in Common (The “Fair Share” Rule)

Tenants in Common allows you to own a specific share of the property, such as 50/50 or 90/10.

• Asset Protection: You legally own your percentage. If your child divorces, their partner can generally only make a claim on your child’s share, not yours.
• Estate Planning: You can leave your share to whomever you like in your Will.
• Verdict: This is the superior choice for joint tenants vs tenants in common debates involving intergenerational wealth.

Real-Life Case Studies

Pros & Cons Summary

Frequently Asked Questions

Conclusion

The “Bank of Mum and Dad” is a generous institution, but it shouldn’t be a reckless one. Transferring large sums of cash without legal structure is not just a risk to your wealth—it is a risk to your child’s future financial stability.

Whether it is a gifted deposit letter, a loan agreement family contract, or a tenants in common purchase, the specific wording matters.