The Bank of Mum and Dad
by Peter Szabo
Updated 1 August 2025
Banks loan money, not gift it. What will you do about the gift/loan to your daughter and son-in-law? Loan documents are prepared. Interest is (sometimes) paid. What do the tax returns say? The aim is to ensure that the loan is repaid in full should the couple separate.
How will the Family Court deal with the transaction?
Situation with no BFA
Family members verbally acknowledge at the time that it is a loan, but the bank (as a condition of the loan) insists on Mum and Dad providing a statutory declaration that the payment was a gift and not a loan.
On separation the advance is at risk of being characterised as a contribution and given less than full credit due to the erosion principle. Mum and Dad typically either whistle for their money or have interesting discussions with their child about the return of the funds after court orders are made.
Protection – Specific purpose BFA
This deals with one aspect of the parties’ financial circumstances. The parents are parties to the agreement and should make the loan conditional on the BFA being signed. Independent advice is given. The BFA does not come into effect unless there is a separation. The first mortgage must be refinanced as an integral part of a property settlement. Documents prepared for the bank are voided. A fresh loan is established. The bank does not need to know about the BFA.
The BFA is in place to confirm the loan, and to negate the erosion principle. Of course, the out law could challenge the BFA, but having been given independent advice the chances are slim.
The good news is that an existing advance can be “freshened up.” A BFA can be entered into during the relationship.