Loan Agreements & Gifts Between Family Members

My son and his pregnant girlfriend recently married.  A couple of days ago they called in – this is pretty unusual so I thought something might be up.  The reason for their visit soon became obvious.  They had just seen a house they wanted to buy but can’t because they don’t have enough money saved for a deposit.  They then asked me if I could loan them enough for the deposit.  I want to help but don’t want them to conveniently forget about repaying any money I lend them.  Is there any way I can show them how serious I am about having the loan repaid?

It’s natural for parents to want to help their children as much as they can.  This is especially so since the property market is so hard to break into.  Also, the small matter of having a baby on the way can’t be overlooked!  This will definitely add to the desire to help make your son and his new wife’s transition to family life a bit easier.

The good news is that there is a way to help out and protect your interests at the same time.  A written loan agreement can do this.  By providing all of the terms and conditions that you have agreed in writing, it will give all parties certainty about what has been agreed and what is expected from everyone.  It helps prevent disagreements which could result in your relationship with them breaking down.

Your son and daughter-in-law might not be expecting a written loan agreement.  They might even view it as a sign you don’t trust them to re-pay the loan. However, formalising the agreement can be a good thing for them. It shows the family that they are serious about repaying the money and are not just asking for a handout. This can be particularly significant in preventing sibling jealousy. People who have been given a leg-up by their parents in the past have been thankful that their loans were formalised.  It serves as a good life lesson of what it means to be independent of Mum and Dad, and it does not leave any grey areas for disagreements and doubt to seep in.

A family loan agreement will also protect your rights should your son and his new wife split up.  I know it’s not a pleasant thought, but you need to protect yourself in case this happens.  If the agreement is not written down, the equity in their house (including the money you loaned them) forms part of the joint assets to be split between them.  This means that your ex-daughter-in-law benefits from your ‘gift’ and has no obligation to pay back the money.  You might lose all or half of the money you loaned.

When making your decision, you also need to think about your other children if you have any.  Will you be able to offer your other kids financial help to the same extent as you are considering giving to this son and his wife?  In this respect the loan will need to be either on commercial terms or on terms that you can extend to all of your kids should they approach you in the future.  This could be a source of family tension if one child thinks the other is receiving favoured treatment.  We all know that this can result in a slippery slide towards family hostilities and open warfare between family members. 

OK, what should I do next?

If you do decide to give the loan, you will need to think about whether you want it to be on commercial terms or not.  After all, you could have done other things with that money, including earning a decent return on it (if that’s possible in this market!). 

You are free to agree on the loan being repaid with any amount of interest – this includes nil interest.  If you do decide to charge some interest you will need to agree whether it is fixed or variable or even pegged to a commercial bank’s home loan interest rates.  You could also make the loan repayment period open-ended or nominate a time by which it needs to be repaid.

If you are really intent on making the loan on commercial terms you could consider charging a higher rate of interest if they default on a payment.  This would demonstrate how serious you are about the loan being paid back.  It might not be good for family relations when you raise it, but it would certainly send a message!

You may also wish to think about whether you want any security for the loan.  Whilst this agreement is classed as a personal debt, it is still possible to ask for security over it