First home buyers are increasingly being boot-strapped into their first mortgage by parents. Many of these informal loans are placing the parents into financial difficulties at a time when they can least bear their consequences. The social consequences can be devastating and far reaching.

Finance expert, David Koch, recently released guidelines to parents considering lending money to their children – DON’T!

Finance expert David Koch. Image: pathfinders.org.au

Finance expert David Koch. Image: pathfinders.org.au

As well intentioned as the lending might be it actually prevents the recipients from learning to stand on their own two feet, extending their reliance on parents into adulthood.

Often parents will lend money to children because banks and other lending institutions won’t. It is very important parents recognize the reasons why credit was rejected. After all, any lending institution stands to make a lot of money from a loan. The reasons for turning down a loan are usually pretty persuasive.

Parents, however, believe they are a special case. They believe their children will make extraordinary efforts to repay a loan from them, above and beyond what they would do for a bank.

Even if this is true such efforts are sometimes not enough.

David Koch advises parents who are determined to go ahead with loans to their siblings to make the loans formal by having the terms and conditions of the loan drawn up by a lawyer. Have repayments scheduled in advance, so both parties know what is expected of the other. And have a back-up plan in place should things go wrong.

These may not seem the most affectionate of measures; but in the longer term they are ones that will benefit both parties the most.

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