03 Feb Q&A – Lending money to family members
Can I lend money to my child for the purchase of a property?
The short answer is yes. The long answer is yes, but there are some practical considerations before doing so. We discussed these in greater detail in our article entitled “Can I gift money to family members, and if so, should I?“
Will my loan affect my child’s mortgage application?
This is a little trickier. When a mortgage lender reviews applications, they will consider any other debt the borrower has when deciding their ability to repay the loan from the mortgage lender.
How will my loan be repaid?
That is up to you, but whatever you do, always document it.
Some chose to grant the loan interest-free but with a repayment schedule, some chose to charge interest but have no repayment schedule, whilst others don’t have any documentation at all.
If you do choose to make a loan without any documentation, remember that you only have six (6) years from the date of the loan to enforce it. After 6 years, the loan is considered to have been “extinguished”.
I don’t have any documentation for the loan, what do I do?
Firstly, how long as the loan been in existence?
If it’s less than 6 years, document the loan without further delay and be sure to include an end date for repayment. This will prevent the loan from being “extinguished”.
If it has been more than 6 years, things get a bit more complicated. The first thing to look at is whether there has been any “confirmation of loan”. This could be reference to a debt in a Company book or other documents, or any part payment of capital or interest. If there has been a “confirmation of debt”, the time will start running from that date.
The loan is for my child and their partner, am I at risk?
Not necessarily, although you would want to consider what would happen if they separated. If the loan from you has not been documented, the spouse could argue it was a gift and therefore the amount loaned may then be considered part of their asset pool to be divided between your child and their former spouse in their separation proceedings.
Could my loan ever be considered a gift?
Yes, but it does depend on the agreement at the time. For example, if the loan was made as part of an early inheritance, it could be difficult to argue it was a loan to be repaid. The same would apply if your child told their mortgage lender that it was a gift and failed to disclose it on their mortgage application.
Can I protect my loan?
Yes, you certainly can. Speak to us today to find out what options are available to you.
To discuss the options available to you, please contact Solari and Stock Miranda on 8525 2700 or click here to request an appointment with one of our Commercial Law Team.