Bank of mum and dad

Hi all,

I've made an offer for a property and am currently in the process of arranging finance. The (BIG!) issue is that the property is 20% commercial and 80% resi. Every bank I've approached does not want to touch it with a 10ft pole. However, one bank is willing to lend to me @ 60% LVR. My parents will also be acting as guarantors on the property, but the bank is only allowing us to use 25% of the equity on my parents' property. So I'm left with a $350k shortfall of funds.

Now I do not know all the rules in the book, and I will be seeking proper and professional financial advice in relation to this, but I suppose it wouldn't hurt obtaining some informal advice on here.

My parents are willing to also lend my brother and I (joint purchase) $350k to meet the shortfall. Is there any way my parents and I could draft a contract stating the terms of the loan with a solicitor such that I will be required to repay them x% interest, payable monthly, over 30 years? Could my brother and I then go to our tax accountants and declare the interest paid on the IP, including the interest paid to my parents, as an expense?

In addition to my question above, would it be better for us to do away with my parents acting as guarantors and say borrow $500k instead? If so, why?

Would appreciate your advice

Thanks
 
Clearly the primary problem is the property is of mixed use. There are a couple of lenders who will do this, but it can be tricky. You may also find that the most you can borrow is 80% of the property value. It may also be possible to use your parents as guarantors, rather than borrowing the money directly from them, but this could make things a little difficult.
 
Seek advice from your accountant, but it's safer and smarter to lend cash to you VS being a guarantor on a or any loan, as it's a private agreement btw you and your parents VS involving the banks etc....
 
Yep I understand it's mixed use. Most banks only want to lend commercial but I've managed to negotiate myself a Resi loan with a big bank with the conditions I've mentioned in my OP (60% LVR and 25% limit on guarantor property).

I am still interested in understanding the tax implications of borrowing from parents. Is the interest payable tax deductible? If so, is there any possibility my parents could charge my brother and I a margin for the "risk"? For example, if they could use their redraw from their 5.2% p.a. mortgage to withdraw $350k, lend to us and ask us to pay 7.2% p.a. to them? Obviously they could then file the 2% p.a. margin as income, and we could file the 7.2% interest as an expense on the IP. Mind you, all of this could be drafted in a contract with the aid of a solicitor if possible.

Am I in lala land or is this really possible?
 
You might find with mix use- Suncorp might be a worthwhile option to consider, i put a lot of mix use through them and LVR range from 70-75% with less conditions than the one you mentioned ( but it all comes down to your financial capability and strength as well) but get your broker to run the deal pass the Suncorp BDM first if you decide to get a "quote" on this path.

Regarding your questions, yep do-able...this is how some trust lending is also done- ie person lends the deposit to the trust and charge a "margin" etc...similar scenario and similar outcome.But your accountant needs to be ok with it tho.
 
Hi all,

I've made an offer for a property and am currently in the process of arranging finance. The (BIG!) issue is that the property is 20% commercial and 80% resi. Every bank I've approached does not want to touch it with a 10ft pole. However, one bank is willing to lend to me @ 60% LVR. My parents will also be acting as guarantors on the property, but the bank is only allowing us to use 25% of the equity on my parents' property. So I'm left with a $350k shortfall of funds.

Now I do not know all the rules in the book, and I will be seeking proper and professional financial advice in relation to this, but I suppose it wouldn't hurt obtaining some informal advice on here.

My parents are willing to also lend my brother and I (joint purchase) $350k to meet the shortfall. Is there any way my parents and I could draft a contract stating the terms of the loan with a solicitor such that I will be required to repay them x% interest, payable monthly, over 30 years? Could my brother and I then go to our tax accountants and declare the interest paid on the IP, including the interest paid to my parents, as an expense?

In addition to my question above, would it be better for us to do away with my parents acting as guarantors and say borrow $500k instead? If so, why?

Would appreciate your advice

Thanks

I am a solicitor and do these sorts of loan agreements all the time. Many other issues to consider too besides the loan itself.

Death - what happens if one party dies. Should the loan be forgiven or paid back?

Incapacity - make sure valid and appropriate enduring powers of attorney in place - otherwise you could be dealing with an attorney who has a different viewpoint.

Wills - make sure the loan is covered in wills of all parties.

Security - large amount of money should there be security?

Market rates - will a loan without security be a commercial loan if the rate charges is around 5%? Possibly not because bank loans take a first mortgage.
 
I am still interested in understanding the tax implications of borrowing from parents. Is the interest payable tax deductible? If so, is there any possibility my parents could charge my brother and I a margin for the "risk"? For example, if they could use their redraw from their 5.2% p.a. mortgage to withdraw $350k, lend to us and ask us to pay 7.2% p.a. to them? Obviously they could then file the 2% p.a. margin as income, and we could file the 7.2% interest as an expense on the IP. Mind you, all of this could be drafted in a contract with the aid of a solicitor if possible.

Am I in lala land or is this really possible?

Yes as long as market rates the interest should be deductible. You would expect a lender without security to charge more for a loan. You should have a legally enforceable written contract in place to satisfy the ATO - and for general legal reasons.
 
I am still interested in understanding the tax implications of borrowing from parents. Is the interest payable tax deductible? If so, is there any possibility my parents could charge my brother and I a margin for the "risk"?

Am I in lala land or is this really possible?

The main thrust of your question seems to be around a party being able to lend money to another party via a contract and pay interest on that loan.

The answer is clearly yes.

Australian families don't seem to do this enough IMO. Every generation in their mid 20's seems to be packed off to the hungry wolves (Banks) and told to sink or swim. Other nations seem to assist their children more than what we do.
 
I really appreciate the feedback thus far

I've just left a voice message with my broker to try Suncorp. Thankfully, I haven't paid a deposit just yet since I was a little wary about financing. So long as I have one bank able to provide me with some finance I am reasonably happy with, I will then pay a deposit and possibly seek a better deal.

Hmm so there is provision for people to make some dough through "private inter-family lending". My brother and I have a very close bond with our parents and they know there is no element of moral hazard which could result from our arrangement given our relationship. My mum is a housewife with no income whilst my dad has a very average income paying 30% marginal tax, both being listed as the owners of the property with the massive redraw available to them. On the other hand, my brother and I earn enough to be paying 37% marginal tax and may soon be hitting the top bracket. In effect, if my parents lend to us at say 10% p.a. and report the 5% p.a. as "profit", there will be a massive tax cost saving since we pay more taxes and because my mum has no income apart from some return on investments.

Is this legal? If so, why aren't people exploiting this option?!

In terms of security, both my brother and I will make sure we take out income protection + adequate life insurance.
 
Is this legal? If so, why aren't people exploiting this option?!

Is it legal for parents to lend at a commercial rate of interest to children? Yes. With a difference in tax rates, yes, there is some advantage (though not as much as you think). Lend 100k, interest rate difference of 5k, tax difference of 37% is $1,850 (and that's assuming your mum has <13k income). Is the risk worth $1,850?

Why don't more people do it? Because not all investments work out, and not everyone can manage their finances properly. If something goes wrong (vacancies, you lose your job, rates go up, whatever), your parents lose out too. Structured correctly you can lower the risk of them losing the house. Some people don't want that risk.
 
Because not all investments work out, and not everyone can manage their finances properly. If you mess it up, you drag your parents down with you.

It's in my best interest to stay financially sound. Otherwise, I could face disciplinary action by the Institute of Actuaries of Australia which could mean that I would not be able to perform actuarial duties.

So far, serviceability with no rental income seems strong between my brother and I so I don't see a massive risk.

So you're saying the scenario I just stated in my previous post is legal and possible? The tax difference is larger than that - 15% split between my parents since my mum is currently @ 0% tax. Therefore, $1.1k/yr on $100k - a saving of 1.1%!!
 
It's in my best interest to stay financially sound. Otherwise, I could face disciplinary action by the Institute of Actuaries of Australia which could mean that I would not be able to perform actuarial duties.

Intentions and reality are very different things. Vacancies and interest rates do not respect the letters afer your name.

It's a risk. You and your family have to decide whether the returns are worth it.
 
Is this legal? If so, why aren't people exploiting this option?!

In terms of security, both my brother and I will make sure we take out income protection + adequate life insurance.

Why would you think it not legal?

And that is no real security for your parents either.
 
Why would you think it not legal?

And that is no real security for your parents either.

The reason I ask is because my brother and I would end up with more dough form the government by way of tax return, and then we could "gift" the additional amount in tax my parents have to pay for the margin they charge. At the end of the day, we would have a surplus from this arrangement.
 
The reason I ask is because my brother and I would end up with more dough form the government by way of tax return, and then we could "gift" the additional amount in tax my parents have to pay for the margin they charge. At the end of the day, we would have a surplus from this arrangement.

Lending money is perfectly legal.

What you would want to be concerned with is the ATO applying Part IVA of the ITAA36 to deny the interest claimed if they consider it a scheme with a dominant purpose of a tax deduction.

So seek legal advice on this before doing.
 
Lending money is perfectly legal.

What you would want to be concerned with is the ATO applying Part IVA of the ITAA36 to deny the interest claimed if they consider it a scheme with a dominant purpose of a tax deduction.

So seek legal advice on this before doing.

Part 4a was the first thing I thought of too when I read this
 
Out of curiousity, does this trigger a CGT event in any way?

If it is a family loan then generally it wouldn't. There are no taxes on gifts. But if it was a loan from a company that was forgiven then there could be tax issues.
 
UPDATE: Settlement has taken place now and the property has been in my hands for a week. Any solicitor on here able to draft me up a loan agreement (as discussed in the thread)? The loan arrangement will be simple in structure (interest only) with a 500bp (5%pa) margin being charged on top of my parents' borrowing cost, payable monthly. I would assume the nature of the work would be quite simple and straightforward if you have done it in the past.

Reasons for the margin include:
- Unsecured loan
- Commercial nature of property

Please PM me quotes if you are able to undertake this work. Thanks!
 
UPDATE: Settlement has taken place now and the property has been in my hands for a week. Any solicitor on here able to draft me up a loan agreement (as discussed in the thread)? The loan arrangement will be simple in structure (interest only) with a 500bp (5%pa) margin being charged on top of my parents' borrowing cost, payable monthly. I would assume the nature of the work would be quite simple and straightforward if you have done it in the past.

Reasons for the margin include:
- Unsecured loan
- Commercial nature of property

Please PM me quotes if you are able to undertake this work. Thanks!

I charge $1100 with legal advice.
 
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