Before taking out a family loan, each parties need to evaluate whether or not they are on the identical page and capable of enter into such an arrangement—and concentrate on the facility and relationship dynamics that may include it. Here are six necessary considerations when borrowing money out of your parents’ bank on your first home.
1. Is it a present or a loan?
Determine whether the financial aid you’re discussing along with your family is a present or a loan. “Make sure there is good communication between the parent and the child about the type of aid,” explains Nicholas Hui, P.Eng, CFP, an advisory-only financial planner at VAVE Financial Planning. “Is it a gift or a loan? If it’s a gift, I highly recommend a gift deed. A loan could be set up with some sort of contract with payment terms and then you could get legal advice to make it absolutely secure.” (More on gift deeds in a second.)
If it’s a present
If your parents gifted you money for the down payment on your house purchase, your mortgage lender may require proof of a present deed or deed of gift. In Canada, a present deed is a legal document that transfers ownership of a property or asset from one party to a different with none money being exchanged. This document confirms that your parents’ down payment is definitely a present and never a loan, which helps your lender confirm the source and nature of the funds.
Hui also recommends discussing along with your family whether that is an early inheritance and, if not, whether other siblings must be informed to avoid future misunderstandings about asset division, especially after your parents die.
If it’s a loan
If you are considering borrowing from a member of the family, discuss the rate of interest. If your parents determine to charge interest, that is not necessarily a foul thing. For one thing, it could possibly be useful to maintain those funds “in the family” and support mom and pa’s bank relatively than a financial institution or mortgage company. And you may also likely profit if the agreed rate is below the prime rate.
Hui says parents could consider Canadian rate of interest as a suggestion (currently 6.95%) after which go somewhat lower or higher – but he says it’s going to rely upon the dynamics, the loan amount and other aspects.
Regardless of whether interest is charged or not, Hui recommends putting all points of the agreement – ​​repayment period and loan terms – in writing so everyone seems to be on the identical page.
2. Consider the tax implications
Although there may be currently no gift tax in Canada, there are some tax implications you ought to be aware of. Interest on a loan is taxable income, so your parents must know that. “Like any investment, they are lending money to their child. If you pay them ‘income’ on that loan, it is taxable,” says Hui.
