The "Bank of Mum and Dad" is now estimated to be the fifth-largest lender to Kiwi home buyers, but often a lack of clarity on whether money has been loaned or gifted causes conflict down the track.
When large sums of money are passed between family members, it's safer for both sides to have this documented in a formal agreement, says financial ombudsman Susan Taylor.
"Difficult conversations at the start will save you the potential of a whole lot of heartache later on," she tells Kathryn Ryan.
File picture Photo: 123rf.com
Recently, an elderly woman who'd lent her daughter money for a home deposit took a complaint against the mortgage broker involved to Financial Services Complaints Limited (FSCL) - a dispute resolution service where Taylor is chief executive.
"This was an elderly mother in her late 70s and she was wanting to help one of her children buy her first home. She said that she would gift her $100,000 towards that first home deposit. But unfortunately, that wasn't quite enough money for the bank to be able to lend so she agreed to advance another $50,000, which she intended to be a loan rather than a gift … She says she told the daughter 'in a couple of years' time I'll need that 50,000 back to help me with my retirement'.
"Unfortunately, nothing was documented. Two years went by and Mother asked Daughter for the $50,000 back. The daughter said 'No, that was a gift to me, it was part of the overall gift to help me get into the home and I'm not going to repay you I don't see why I should'."
The mother then took out a complaint against the mortgage broker, Taylor says, believing that they should have drawn up legal documents confirming that the additional $50,000 was a loan.
Because the mortgage broker had recommended to the older woman at the time that she get independent legal advice and documentation, FSCL found no fault on their part and the money didn't have to be repaid.
"There was some misunderstanding. She thought the mortgage broker was going to look after that and draw up the documents. But clearly, that's not part of the financial advice role. They're not qualified to do that. A good mortgage broker would urge the parent to make sure that they've got all their I's dotted and T's crossed and get some independent advice."
Susan Taylor, the Financial Ombudsman and CEO at FSCL Photo: FSCL
Disputes centred around whether a sum of money transferred between family members is a loan or a gift are common, Taylor says, and proper documentation of a lending arrangement offers security for both parties.
"[That way] both sides know where they stand at the start and two or three years down the track you've got that written agreement there."
In New Zealand, there seems to be a bit of a "she'll be right attitude" to money lending within families, Taylor says, and people may feel embarrassed raising the idea of formal documentation with their adult offspring.
"Nobody wants to believe that their loved ones, their son or daughter, might try and pull up a fast one over them later on ... but things can change, sometimes there are other family dynamics that come into play. So the best advice that we can give is that no matter how much you love and trust your [family members] get some documentation."
If people feel a bit unconfident or embarrassed about having such a conversation, Taylor suggests making it "a whole family chat".
"Bring other family members [around] and talk about what you're intending to do, which would also then provide some extra evidence, if you like, as to what was agreed at the time, or perhaps bring in a third party, such as a lawyer or a good family friend to have that difficult conversation. Difficult conversations at the start will save you the potential of a whole lot of heartache later on."
New Zealanders who feel they've been treated unfairly by a financial service provider have the right to complain to a financial ombudsman service such as FSCL free of charge, Taylor says. If their complaint is found to have merit compensation of up to $350,000 can be awarded.
Related:
Financial planner Liz Koh on 'the Bank of Mum and Dad'
The 'puzzle' of parenting adult children in 2023
Nigel Latta on the changing face of intergenerational wealth
