The importance of recording loans between family members

A retired woman sold her house.  Her daughter was struggling to secure funds for a house deposit so the woman agreed to lend her daughter $50,000 on the condition that the daughter repaid it when earning well enough.

The mother engaged a mortgage broker who advised that the bank that was lending funds to her daughter to buy a house wouldn’t accept the $50,000 contribution as a loan to the daughter, and instead required the mother to sign a deed of gift for $50,000.

In the period following, the mother-daughter relationship worsened, and neither the broker nor the daughter’s lawyer had any record of any documentation recording the loan terms for the daughter. 

This is an unfortunate example of the importance of ensuring that any loan (whether big or small) is recorded in writing. This is often overlooked and not considered important when it comes to family members lending to each other, especially where the money is needed quickly.

As in the example, banks will often require that an intended loan instead be a gift in order to meet lending requirements.  Some people try to circumvent this by attempting to enter into a loan agreement in the background without their bank’s permission.  This is a clear breach of the borrower’s obligations to their bank and could result in the bank withdrawing the lending.

Generally loans will be recorded in either a Term Loan Agreement or a Deed of Acknowledgement of Debt.  However other options could include entering into a Property Sharing Agreement, which records the lender owns an unrecorded equity share in the property for their contribution.

While financial advisors and mortgage brokers can provide clarity on ability to lend and gift money, it is always best practice to obtain independent legal advice to make sure you are protected from any unexpected losses if your relationship with your family member sours, or in the situation where lending to a couple, their relationship ends.

Leading law firms committed to helping clients cost-effectively will have a range of fixed-price Initial Consultations to suit most people’s needs in quickly learning what their options are.  At Rainey Collins we have an experienced team who can answer your questions and put you on the right track.