When it comes to milestones in life, borrowing mum or dad’s car keys has been a big one for several decades.
However, in the current competitive real estate market and stretched personal savings, a new milestone is asking for $10,000, $30,000, even $100,000 from mum or dad to top up a home loan application.
No matter what you call it, we view such an action as a private mortgage, and there are traps for all players.
Helping family feels good
Before I highlight some of the pitfalls of entering into private mortgages lightly, let me quickly put on the record that I believe it is virtuous and satisfying to be able to help family members when you have means.
Many successful people in life have benefited from the generosity or grace of their families, without which they might have never had the foundation for today’s prosperity.
However, even though many parents are tempted to ‘gift’ the money to their children, a stark reality today is that situations can change and that money might not end up benefiting the person intended.
Say it out loud, ‘private mortgage’
If you’re inclined to ‘lend’ or ‘gift’ funds to your children, we would encourage you to explore the option of setting up a private mortgage to protect your ‘lending’.
A private mortgage is simply a legal agreement between two parties that aren’t banks or financial institutions (in this case between parents and an adult child), in which the parents lend money in return for repayment, interest, and their child’s share of the real estate if he or she doesn’t pay it back.
We have seen private mortgages prove to be invaluable in cases where a child’s relationship breaks up and their former partner tries to take some of the funds from the parents.
In my experience, most parents naturally try to avoid using the word ‘gift’ to make sure their options remain open for asking for funds to be returned should a relationship break down and the property get sold.
Another unforeseen circumstance is when a child dies or is sued or suffers some other calamity in which rights and access to assets are lost or become subject to other demands.
Let a conveyancer’s steady hand shape your private mortgage
There are pros and cons to private mortgages for parents (the lenders) and children (the borrowers) but as you would expect from a conveyancer, I believe many of the possible disadvantages can be avoided with the right documentation.
One of the main advantages of private mortgages is their ability to formalise a way of keeping wealth within the family. It is also the case that children do not need to meet the more stringent demands of banks; they are pre-qualified, one might say.
On the downside, damage to the core asset and changes to relationship status are prominent, along with subtle changes in relationships for some people when the roles of parent and child become lender and borrower.
In our experience, the best way to mitigate many of the risks of default or disagreement is to capture expectations, repayment schedules and how money is to be repaid if and when something goes wrong.
While private mortgages should never be entered into lightly, neither should substantial loans when the loss of that capital stands to cause great hardship to the lender.
It might even be prudent to chat with us before offering to lend any money at all, to see if a private mortgage is the right vehicle for your family to exploit real estate opportunities.