Borrowing money from family

[Phil87]

Hi SS'ers,

Our PPOR will be ready in the next few months and as such we have gone through a mortgage broker (Jamie from PassGo), to start arranging for finance for our property (looking at borrowing around 350k, and having around 110k in offset).

Earlier today my partner and I were expressing our disappointment to her parents that our house has been pushed back from late August to October, after a fairly lengthy conversation about all things property and finance...we discovered that my partner and I had inadvertently offended her parents by not asking them for a personal loan when financing our property.

My partners parents are recently retired with a lot of cash sitting in term deposits (they dont want to take the risk with properties or shares), and a fully paid off house and 1 fully paid IP...who are pushing for all of us to go and see a lawyer, and organise for us to borrow money off them and repay them at a rate of 6.5% (increasing at what ever rate the banks have on their high interest savings accounts)...I am skeptical about this kind of arrangement and have declined the offer, however my partner wants me to seriously consider the offer, not only for the sake of a cheaper arrangement but also so her parents get satisfaction in helping.

So as apart of my due diligence and consideration, I thought I would raise the question with you guys...what would you do, and why?

Cheers

Phil

 

[Ed Barton]

My partners parents are recently retired with a lot of cash sitting in term deposits (they dont want to take the risk with properties or shares),

your partners parents would be investing in something that has all the downside risk (an individual goes tits up and doesn't pay) without the benefit of upside gain (capital gains). a bad investment for them.

if they are looking to early inherit then that is a different matter. which one is it?

 

[pennyk]

I borrowed money several times from my parents, primarily as a stop gap measure. We just wrote down the arrangement on the back of an envelope and Dad kept track of repayments and when it was fully paid off, they tore up the envelope. It worked for both of us.
If you are doing interest payments, to compare with the banks, you'll need to do compound interest in order for them to not lose out.
If they want to help you, and it wont damage them financially long term, and you are fairly confident that the relationship btw them and you is fairly sound, I wouldnt have a problem doing it. Having a lawyer draw up a formal document gives you even more security.
They should also document in their will that any money owed should be repaid or they reduce the amount of inheritance, to protect any siblings' interests.
Just make sure you pay back on a regular basis, at the full amount you should... treat it just like a bank loan and dont abuse their generosity.

 

[Phil87]

your partners parents would be investing in something that has all the downside risk (an individual goes tits up and doesn't pay) without the benefit of upside gain (capital gains). a bad investment for them.

if they are looking to early inherit then that is a different matter. which one is it?

I was reluctant straight from the start, so I may have misunderstood the offer...but from my recollection it wasn't an early inheritance (if so, I am intrigued by the 6.5% interest rate).

I tried to explain that if they had that much $$$ sitting there that they should be investing into other avenues that offer greater returns, but then we received the rather corny line of "Whats better than investing into family"

Personally my major reason for wanting to decline the offer is when it comes to investment properties, they don't like the idea of debt one iota and thats why they want to give us this opportunity of not owing the bank...but we both want a property portfolio in the future which will require high amounts of debt anyway which is exactly what they want us to avoid, I will be mentioning this to them this weekend

 

[Kristine..]

Hello Phil

If you do decide to borrow from the parents make sure it is a formal mortgage loan arrangement, properly documented and registered with full recourse under the law

Many things happen in life, to you and to the parents

If they got hit by the proverbial bus, what about the other siblings? Would they allow you 30 years to pay back the estate?

What about if the parents have a change of mind, get sick, need to go into a nursing home, and decide that next week would be a good time for you to repay the money?

It is a rare lender which will provide funds to refinance private borrowings, so you may find that refinancing the debt is not possible when you may want to do so.

It is quite different for a parent to lend money for a car, or even money for a deposit. To lend the whole mortgage amount is somewhat unusual and apart from interest, what payment do the parents expect?

There is no such thing as a free lunch and there is no such thing as a friendly loan - of $350,000

Fences make good neighbours. Do not borrow from family if you want them to still respect you in the morning

Cheers
Kristine

 

[Jocker10]

Hi Phil.

If I were you, I wont. Don't borrow from your family. Only borrow from family only if you have no other options.

It is better that they get offended now than experience a war ( that may or may not happen ) later.

Tell your in-laws that you and your wife are starting a property empire using OPM ( other peoples money ) not family money.

Mention that they just retired and its time for them to enjoy the fruits of their labor. But caution them not to spend it all as you may need to borrow from them in the future.

Cheers Jocker10

 

[Terryw]

Good advice from Kristine.

Many issues to consider, including the practical issues of refinancing the loan if need be. Any small dispute can also ruin the relationship permanently. Since you would not be getting much of a discount and they could probably get similar rates with a banking institution it is probably not worth the risk in my opinion.

 

[softmonkey]

Just a counterpoint - they might prefer to invest in someone they know personally than say, a Sonray or a Lehman Brothers. In some ways, the old school idea of family depending on family is a bit of a dying breed. Nowadays every household in a family stands independent and tries not to depend on or commit too much to the other households, whether it's money, or living together or looking after each other. Sometimes I feel it's all a bit formal. You could say nothing brings family together like a huge pile of responsibility or debt

 

[Rolf Latham]

As always, the rules of thumb are exactly that.

I usually recommend against this sort of thing and or/ family guarantees unless the parents have a fair slab of other investments and or cash around.

ta
rolf

 

[The Y-man]

...what would you do, and why?

Quite common in Asian families.


The Y-man

 

[MC1]

Approx half a percent discount than what you can receive on the market..... pfffffffft some parents, ......... I'd borrow from the banks on principal and tell them to stick their money

 

[josko]

If you are Asian, Greek, Italian, Lebanese..... Yes .

If you are Aussie- no way mate.

Regards JO

 

[Mick C]

If you are Asian, Greek, Italian, Lebanese..... Yes .

If you are Aussie- no way mate.

Regards JO

AHah so true

Phil- Kristine's post hi-lights some very important consequences and consideration.

But if you really need to go ahead with this arrangement; a solution i provide to my clients who has the SAME "problem" as your's is - term deposit security.

1. Money placed in term deposit ( say $200,000)
2. Used this term deposit as "funding"/security
3. Borrow the rest...as you would

-> You will get the interest from the term deposit-- which you can deposit back to your parents + any additional % you have arranged.

-> when the time comes you can release this term deposit as you wish as long as you met the LVR conditions and LMI ( if any) ** note It needs to be there for a MIn of 1 year most of the time **

Regards
Michael

 

[wobbycarly]

Jamie's going to miss out on his commissions...

 

[Peter_Tersteeg]

Consider borrowing the money from the bank, then using the parents funds to pay down the loan via an offset account.

This gives you the ability to get cash to the family if they need it in a hurry, but in the meantime reduces your mortgage. Jamie even get's his commission!

 

[Mick C]

Jamie's going to miss out on his commissions...

haha i doubt Phil parents is going to lend them the FULL amount???

Either way, when phil consider buying another IP- Jamie will be ready

Regards
Michael

 

[Phil87]

First of all, I appreciate everyone taking the time to reply to my question as well as outlining some very valid points.

I do like the idea of 'borrowing' the money and putting it into the offset account, now I will just have to try and teach them that this is essentially the same as us not having a mortgage at all...in the past teaching these old Dutch folks new things has taken a while, so hopefully they will comprehend...that way they can have the satisfaction of helping us get started, and also would allow for me continually refinance to purchase more IP's in the future.

 

[Phil87]

Jamie's going to miss out on his commissions...

Jamie has been a lot of help throughout my first purchase (and has been very understanding considering the constant delays of receiving information from both myself, as well as information from the builders), and for that even if I did choose to take the in-laws up on the offer I would have spoken to Jamie to organise a nominal fee that I could pay him for his efforts (after all its only fair).

 

[Phil87]

haha i doubt Phil parents is going to lend them the FULL amount???

Either way, when phil consider buying another IP- Jamie will be ready

Regards
Michael

Yeah the in-laws were (still are) wanting for us to borrow up to 90% (even though as it currently stands we will have the funds for 35% of the property), originally they were wanting to lend us the money at an interest rate of 4%, and they only increased it to 6.5% when I kept declining saying they could do better to put it into term deposits or online savings accounts.

I must admit I am surprised by their generosity with the offer, but will be looking to decline it again this weekend or at least 'compromise' by getting the loan with the bank and 'borrow' like 250k to put with out 110k in the offset account...and keep reducing their 250k loan as we get more money fortnightly to top up in the offset account

 

[Jamie M]

Jamie's going to miss out on his commissions...

Haha - yeah Phil, who's going to explain to my pugs that there won't be any bones on the table this month

Just jokes!

Whether it's this one or the next - I'm sure I'll be helping Phil out with a loan at some point.

Phil - good luck explaining the offset scenario to the Dutch in-laws. I wouldn't even know where to start with my German ones

Cheers

Jamie