Lending from parents (Pros and Cons)?

Viewing 6 posts - 1 through 6 (of 6 total)

Ben
Participant
@albanga
Join Date: 2014
Post Count: 54
May 30, 2014 - 9:37 am
I’m interested to hear peoples thoughts on loaning from parents versus the bank.
I am about to get a construction loan of around $250,000 which i am not sure if this is correct but hear it carries a slightly higher interest rate?
Even If this is not the case and it is around 5.2% then I have spoken to my parents who have agreed to loan me the money at the same rate they would receive from having the savings in the bank which is around 4%.
I obviously get the benefit of a reduced interest rate but does it carry any negatives to me loaning the money from them? Can this affect future investments?
There is also ofcourse the negatives and risk my parents would have with this set-up as opposed to the security of a term deposit.
Just throwing it out there though to hear peoples thoughts :). Has anyone done something like this before? Did it work?
Dwight
Participant
@bigvman
Join Date: 2002
Post Count: 42
May 30, 2014 - 2:25 pm
I’ve borrowed from my parents in the past. In fact I currently have a loan from one parent and I’m paying market interest. So to me it’s a win-win. I get access to a little more than the bank will lend me and they get a little more interest than term deposit.
I had a written loan agreement drawn up first and this is the very minimum to ensure that there is an element of recourse should things not go to plan.
It’s also bst to discuss the term of the loan and what you will do if things go pear shaped. Better to talk about it now and make a clear decidsion as to how to proceed. If you wait till there is an issue it will get mighty messy.
If you don’t need the money and the bank is willing to lend to you then yo DO have to considerwhther you’r emissing out on an opportunity to develop a business relationship there.
That’s not my area so I won’t comment, but I think that’s what you’re asking.
Anyway, best of luck.
Dwight
Dwight
Cashflow Positive Investor
Jamie Moore
Participant
@jamie-m
Join Date: 2010
Post Count: 5,069
May 30, 2014 - 3:34 pm
Hi Ben
You don’t always pay a higher rate for construction – and when you do, it’s often easy enough to roll the loan into a standard loan upon construction being completed.
What are the negatives when it comes to borrowing from parents? The big one is mixing business with family – which can work well for some and not others. Will you need/want to access equity in this property down the track? That’s something to consider (although it may be possible to refinance the personal loan later on too – I’ve done that for a forum client previously).
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone Me
Mortgage Broker assisting clients Australia wide Email: [email protected]
CRenee
Participant
@kali14
Join Date: 2012
Post Count: 9
May 30, 2014 - 8:33 pm
I guess you wouldn’t get the benefits of an offset account
Terryw
Participant
@terryw
Join Date: 2001
Post Count: 16,213
May 31, 2014 - 12:11 am
Borrowing from parents? (Lending from is grammatically incorrect isn’t it?)
You should get legal advice before you do anything as there are many issues.
1. You should document this, whichever way you do it. What if a parent dies and then there is a dispute over whether it was a loan or a gift = litigation.
2. For tax purposes you should have a commercial loan agreemnt
3. What are the tax consequences to you and the parents
4. What are the centrelink consequences
5. Wills – shoudl the loan be mentioned, forgiven etc?
6. Cashflow. What if a party dies mid construction, how do parents get money back? How would you pay back in a hurry if need be
7. deductibility of refinancing this loan down the track.
8. bankrupty – the risk for your parents if you cannot repay
9. Security – shoudl the parents take a second mortgage over your house?
etc
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email Me
Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
thecrest
Participant
@thecrest
Join Date: 2004
Post Count: 992
June 1, 2014 - 4:44 pm
Sad but practical, If you borrowed more than their will would pay you, would other beneficiaries demand immediate payment to pay them out forcing you to attempt refinancing elsewhere and probably on a time limit ?
Is a forgiven debt deemed to be a gift by the Govt ?
Are gift duties payable on a debt forgiven in a will, or just forgiven anytime ?
Can you repay them at an exorbitant interest rate to help them ?
Interesting possibilities .
Cheers
thecrest
thecrest | Tony Neale - Statewide Motel Brokers
http://www.statewidemotelbrokers.com.au
Email Me | Phone Me
selling motels in NSW