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Borrowing Money from Parents to Buy a House – Pros & Cons
With the cost of housing rising disproportionately to wages, for most first home buyers borrowing money from family to buy a home can be a viable option. However, it is important to approach this decision carefully and thoughtfully, considering both financial and personal dynamics.
Here are our top 10 tips to consider:
Top 10 Tips to Consider When Borrowing Money from Parents to Buy a House
1. Clear Terms
Establish clear terms for the loan, including the interest rate, repayment schedule, and consequences for missed payments. Put everything in writing to avoid misunderstandings later.
At ALA Law we regularly prepare Loan Agreements which set out the perimeters of the agreement between relatives from the outset. This means everyone understands the agreement, rules, and their obligations. We can also attend to the registration of the agreement by way of a mortgage or caveat to secure everyone’s interests.
This means fewer disagreements in the future and a clear path forward.
2. Financial Impact on all parties
When borrowing money from your parents, you need to consider the financial impact on them also. If the family member has the funds readily available, it could be a win-win situation for all. However, if lending the money strains their finances or future plans, it might not be the best choice.
You also need to consider what happens if your parents require the funds to be repaid due to an emergency or their own situation – how will you access the funds to pay them back?
Other things to consider include how it will affect Centrelink (if they are aged pension age – or likely to be in the near future), who will fund their RAD (Refundable Accommodation Deposit) for placement in a retirement home (if care is required) and how their future needs will be met if their money is tied up in your property?
Part of the planning process is having a clear plan as to how to address these issues prior to borrowing money.
3. Potential Strain on Relationships
Money matters can strain even the strongest relationships. Mixing family and money is often said to be a mistake. The key to this successfully occurring without creating future issues, is to ensure that a full agreement has been negotiated, agreed, and legally entered into that sets out the perimeters.
It will also give the parties the avenues they can take if one party fails to comply with the terms of that agreement.
Make sure everyone involved is comfortable with the arrangement and understands the potential impact on the relationship.
If having this form of discussion is uncomfortable – that is a good indicator that you may have future issues in relation to the loaned amount, and it will likely cause a strain on the relationship.
4. Alternative Options
At ALA Law, we always recommend exploring other financing options, such as traditional mortgages, before deciding to borrow from family. The intermingling of finances can be complicated and become messy in the future, and avoiding this conflict from the outset is often the best choice!
These options might have different interest rates and terms, so it’s essential to compare all your options, weigh the pro’s and con’s and make the best decisions for you and your parents.
5. Legal Considerations
If you do wish to borrow money from your parents, it is essential you see a Lawyer to have a loan agreement formally prepared.
This will protect both parties and set out the terms of the agreement. It will also protect your parents should you separate from your spouse in the future or have debts you cannot meet which causes someone to pursue your assets for payment.
6. Realistic Repayment Plan
Have a realistic plan for repaying the loan. Set up a schedule that works for both parties and consider the impact of unexpected life events that could affect your ability to make payments. Also, talk about what happens if payments cannot be made.
Ensure this is then written into the formal loan agreement.
7. Predict Future Changes
Part of this process is realistically attempting to anticipate potential changes in circumstances. The key to this discussion is determining how (if required) you will be able to repay the funds if they are required urgently or if the provision of funds negatively affects your parents financially in the future.
Try to establish “a get out of jail” plan for the vicissitudes of life.
8. Communication
One of the main things when borrowing money is to ensure that you maintain open communication throughout the process.
Regularly update the family member on your progress and any changes to your financial situation. Talk through anything difficult that has arisen, be open, honest, and transparent at all times to minimise conflict.
9. Family Dynamics – Emotional Factors
When reaching an agreement to borrow money from your parents – family dynamics play a huge role. Borrowing from family can carry emotional weight, and it’s crucial to navigate these feelings with sensitivity.
In addition, you may need to consider siblings, or others who have a financial interest. Also, consider things such as “will this loan be forgiven on the death of your parent? Or will it need to be adjusted in their estate?” Discuss these issues with family in an open and transparent environment where possible.
10. Exit Strategy!
You must have your own exit strategy. You need to consider what would happen if the relationship sours or if the family member needs the money back unexpectedly. How will you get the money together to repay the loan? Having a clear exit strategy in place can help alleviate potential stress.
In summary, borrowing money from a family member to buy a home can be a suitable option if done thoughtfully and transparently. Make sure to approach the situation with respect for the potential impact on both party’s financial and personal aspects.
The Team at ALA Law are experts at navigating this process and acting for both parents and children in relation to Loan Agreements, Mortgages and securing interests by way of caveat. Although it seems overwhelming, transparency from the outset is essential to ensure smooth sailing during this exciting period of purchasing a home!
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