Helping your family financially?

If your child is not able to take out a loan on their own it is probably because the bank does not consider them to be a good risk. That is, the bank is not confident they would be able to pay back the loan and they do not have assets of sufficient value to act as security for the loan if they failed to pay.

Your child may be overly optimistic about their ability to finance any loan they take out. They may not have considered carefully the consequences for you if things went wrong. As you are the one who has the most to lose, you need to be very realistic.

If the bank doesn’t consider them a good credit risk, neither should you.

Legal documents such as loans, mortgages and guarantees can be complex and difficult to understand. Don’t rely on your child or a bank representative to explain to you what it will mean for you if you sign any document.

It is important to get independent legal advice before you make any decisions to help a family member financially when your home is your only asset. This means seeing a lawyer who has not also been seen by your child or the bank, and speaking to the lawyer without anyone else in the room.

This will help you be confident that you understand what you are letting yourself in for. The cost of getting this advice may save you much more money in the long term if things went wrong.

There are often better alternatives to a reverse mortgage. You should also get financial advice before making a decision about a reverse mortgage to make sure you fully understand the risks and alternatives.

It can be difficult to refuse a request for financial help from those you love and want to help. You may want to help but it may not be realistic for you to do so. You should make sure you have as much information as you can about the financial situation of the person you want to help, the agreement you are entering into and the risks involved.

If the only asset you have is the home you live in, you should ask yourself:

• Is the risk of losing my only home too high?
• How will I cope if I have to leave my home?
• Where would I live?
• How will this affect my relationship with my other children or what I intend to do about their inheritance?

Not being able to help doesn’t mean you don’t love your children. You have a right to protect your own interests.

Your children should understand that to risk losing your home when you are in the later stage of your life is particularly difficult. You don’t have the same chance to start over as someone younger does.

If you lend money to a family member it is important that you make it clear in writing whether you intend to give the money as a gift or whether you expect the money to be repaid at some time. The written agreement should be signed by both of you. Without anything in writing it can be hard to prove that the money was a loan not a gift.

A written agreement about whether the money is to be repaid, by when and whether interest is also to be paid, will help if there is any disagreement about this in the future. You should get legal advice before signing such an agreement.

You can take legal action to recover money that is owed to you. However under the law you only have 6 years from the date the money became owing to you to start court action. It can sometimes be difficult to work out when that date is, and you may need to get legal advice about this.

Helping your family financially may affect your pension entitlements. Centrelink has rules about how much of your assets you can ‘gift’ before your pension will be affected.

If you lend money to a family member the loan will be assessed as part of your assets and could affect your pension entitlement. This includes if you take out a mortgage over your home and loan the money to family.

For more information about how your pension could be affected, see the Legal Aid NSW brochure ‘Your home and the age pension’.