Lending money to family is usually done with good intentions. A prime example is when parents help their kids buy their first home in a competitive and expensive market. However just because they’re family, that doesn’t mean they can, or intend to, pay it back. When lending money to family, proceed with caution.
There are numerous media stories about the perils of lending to family. In extreme cases, families end up opposing each other in court. This happened to Marian and Trevor Warin, who sued their daughter, Colleen, over an unpaid loan of more than $360,000 in 2017. As is all too common, the terms of the loan were never formally documented, and the parties expectations regarding the funds were clearly unaligned.
When loans are taken out through banks and finance companies, everything is documented. There’s paperwork for miles. Signatures on dotted lines. Clauses. Conditions. Fine print. Not a thing is missed. On the other hand, generally when loans are given from one family member to another, things are usually done based on trust with very little discussion regarding the finer detail.
Before agreeing to lend a family member money, we recommend thinking about the following:
- Do you have any expectation that this money will be repaid? Are you expecting any interest to be charged?
- Who else is lending money to the family member? If they’re receiving money from a bank, then the bank will register a mortgage over the property and any money the bank is owed will take priority over any money you’re owed. Further banks will generally require that any family loans must be on the basis that repayment can only be demanded when the property is sold. Can you accept that you will have no control over when the property is sold, and the loan is repaid?
- If the family member is in a relationship, is your loan protected from becoming relationship property?
- If you lend an amount to a family member, do you have enough should you wish to lend the same amount to other family members?
- Can you afford to lend money without impacting on your current situation or retirement?
If the intention is that the money is to be treated as a loan not a gift, then it’s important that it’s correctly documented as such.
Any upfront costs faced in documenting the loan correctly, will be money well spent and will save you significant cost and stress in the long run.
For more information about the ways that you can help your child (and equally a family member) into their first home – please check out Convex Legal’s blog https://www.convexlegal.co.nz/homebuying/helping-your-children-buy-a-home/
If you would like to chat about this feel free to contact us.