Do you have a family and friends who care about your situation and who have the financial resources to help you buy a home? Among those wishing to buy their first home, "intra-family mortgages" are increasing, representing 10-100% of the purchase price of the property. But you need a plan to avoid quarrels and pitfalls that can come from the mix of money and relationships. The best way to borrow money from people you know is to make the deal according to all normal procedures, in the most formal way possible. Read on for more detailed instructions.
Steps
Step 1. Find a lender
Consider relatives, friends, and associates who trust you and want to see you own a home. You will have to pay interest (and you can deduct the interest payment if the mortgage is properly documented), so find someone who can benefit from these regular payments.
Step 2. Agree on the terms of the loan
Discuss the terms of the loan and reach an agreement. The standard elements of the contract include the amount, the interest rate, the term, the terms of repayment of the loan (the type of repayment and the frequency of payments). The interest rate used in mortgages granted to family members is on average 4.7% but you and the person who lends you the money can discuss alternative proposals and arrive at a shared choice of interest rate, in which both of you can consider you satisfied.
Step 3. Arrange for the drafting of the documents
You will need a promissory note to document the loan. If the credit is secured by a property, you will need a mortgage. You can buy pre-prepared versions of these documents online. However, buying a house is a rather complicated operation and it would be better for a professional to draw up the documents, which comply with all the requirements established by law. You can contact a civil lawyer or a private company that offers personal loans.
Step 4. Make a plan for paying the installments
Use a financial calculator: enter the data relating to your loan and generate a list of due dates, which will be accompanied by the payments due and create your personal calendar of payments of the loan installments. Send a check in advance before each deadline. You can also rely on an accountant, who will take care of the payments, or arrange to pay each month through online bank transfers.
Step 5. Repay the loan as agreed
As long as you stick to the payment plan that is also included in the promissory note, you are on the right track to fully repay your debt. If you find yourself in a bad financial situation, let the lender know. Those who lend you money want to see you succeed (probably because they want their money back!) And may be willing to postpone payments from time to time, or convert what is owed into a donation.
Advice
- Be honest and sincere. If the loan is between parent and child, communicate the terms and nature of the loan to the siblings. It indicates that the agreement is a formal loan, not a donation, and will also be handled by professionals. Be prepared to offer a similar deal to others so they don't get jealous. Similarly, hiding a private loan from your spouse or partner is just a source of trouble.
- If you are unable to pay back what was agreed, compensate in another way.
- You can agree on an interest rate that is beneficial to both of you. Chances are you can agree on an interest rate that is better (lower) than what you would get from a bank, and better (higher) than what the lender can get through financial investments of similar duration. Since interest has to be paid (because otherwise it would be a donation), most borrowers prefer to pay it to a relative rather than a bank.
- Rest assured by making sure that the loan is handled by professionals. Professionals can take care of the more complex aspects of loan management. This work includes loan documentation, monthly payment reminders and accounting, year-end reports, and debt restructuring agreements as needed. Professional management is useful in the tax return period as both parties will need a year-end report to document interest payments if the lender wants to deduct it.
- Apply the minimum interest rate. The Revenue Agency assumes that a transaction between family members is a "donation". One way to rebut this presumption is to apply minimum rates; the interest rate changes every month and can be found online.
