Loan to son to purchase PPOR

Discussion in 'Legal Issues' started by Soy, 20th Jan, 2020.

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  1. Soy

    Soy Well-Known Member

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    We are seeking help from an experienced lawyer for the below. If you know of anyone suitable please let us know.

    We are lending money to our son as deposit for the purchase of his PPOR. The house and loan from bank will be in his sole name. He is currently single and will potentially get married. The potential partner is happy to sign a prenup (though we have heard this may or may not stand up in court). Son's earning is much more than potential partner.
    Son is looking for house currently (Sydney).

    We would like to have a loan document drawn up for assert protection purpose so that in the odd case that his marriage ended ugly and the property had to be sold/ splitted, our $$ would be paid back to us with interest.
    -We do not need him to pay any on-going interest.
    - Accumulated interest is to be paid when the house is sold (this is only executed if ugly marriage breakdown, if all goes well, the $$ will really be our gift to them).

    Son has talked to banks and they said that the private loan is a private agreement they don't need to know. All they know is he has that deposit amount and the bank will proceed normally.
    Q: would the house need to be mortgaged to us as a second mortgage so our loan to son is legally tied to the house,or just the loan agreement is good enough ?. We don't want to take 2nd mortgage if no-need because we would like him to still be able to take advantage of the equity (as the loan from bank would only be about 30% of the property value).

    Is what we are after reasonable/ do-able/normal ?

    Much appreciated any feedback/ advice etc.
    Thank you.
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    That is relatively straight forward. Watch out for the tax consequences of incurring interest, even if it is not paid.

    You don't need a mortgage over the house but need to consider the risks of not having one. Having a second mortgage wouldn't necessarily prevent him borrowing further against the property.

    Your comments about the prenup sound like they didn't come from talking to a lawyer.

    Many lenders will want to take the loan into account for lending purposes too as it is a debt. Telling a bank otherwise could come back to bite later.

    And watch out for the limitations act. The loan could be unenforceable after 6 years of no repayments.
     
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  3. Rugrat

    Rugrat Well-Known Member

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    That's not been my experience. We were actually 'gifted' some money (living inheritance) and the banks required evidence (letter of statement from the gifters lawyer) that it was in fact a gift and not a loan. They ask for bank statements for up to 6 months prior, and they could see on the statements the large sum being deposited.
    Lenders also tend to ask about other debts and liabilities, which include private debts, especially when they are drawn up legal agreements.
    He may also have issues with lenders if you are wanting to lodge a caveat for your personal interest in the property.
    Although technically these are his issues in acquiring a loan, not yours.


    Aside from this Can your son afford to repay his debt to you on top of a mortgage and other associated home ownership costs (rates etc)? Have you considered what happens in various scenarios that could happen? Ie, son gets a spouse and kids, and then passes away; or falling out occurs with your son for some unforseen reason; or son goes bankrupt and loses it all; or something happens to you or your spouse and you need money back for medical issues but son is not in a position to repay, etc. (No need to answer here, just saying you need to consider situations you may not have or don't believe likely to happen - because those are the situations that catch people off guard).

    Definitely seeks out good legal advice on this before you proceed. And make sure you have all your ducks in a row before doing anything, don't let yourself be rushed if you feel any hesitation.
    I think it great you want to help your son. You just need to make sure you helping now doesn't cause issues in the future.

    I've always been brought up with the lesson:
    "Don't loan money to people you love, if you cannot afford to gift it."
    You can loan money to them, but make the decision before you loan it, in the worst case senario, would you be willing and able to forgive and walk away from the debt to maintain the relationship? Or would it mean the end of the relationship for them to not repay you the money? Sometimes its better not to loan money if there is any chance it could mean losing the relationship.
     
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  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    I have had some success in getting some lenders to disregard related party loans from family members. But any letter or other stat dec etc provided can be subpoenaed later and used against you as can other correspondence during the loan application.

    There is also the timing issue of when the loan is made. That is a mini strategy in itself.
     
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  5. Soy

    Soy Well-Known Member

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  6. MWI

    MWI Well-Known Member

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    yes it'd doable, we have lent actually 90% to our adult child, no partner or spouse yet (for IP in QLD not PPOR and solely in his name too). We have a very good lawyer I can actually PM you on this who writes your requirements into contract rather than using templates and would place the caveat on title too (guide you through this process) or advise you on this.
    Few things to consider so long as you realise:
    1. The equity growth in the property is not protected hence say you son buys for $700K, 30% loan
    would represent $210K from bank and say 70% your loan so $490K.
    Now assume the PPOR is now worth double say $1,4M then minus your loan of $490K, so now $910K is now exposed. Nothing wrong with that as long as you realise and understand that.
    2. If the son buys in his name PPOR will he be entitled to any FHO schemes or grants if within price range? Sometimes can buy in trust name instead so then adult kids can claim later if required. I suppose this applied more to IPs being bought first rather than PPOR.
     
  7. Soy

    Soy Well-Known Member

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    Many thanks to Terry and Rugrat for your great feedback/ advice.
    We will consider all points you have mentioned.
    Terry if the 2nd mortgage does not prevent son from accessing equity then we will have it done.
    And no we have not formally approached anyone for prenup drawn up. I think the house purchase will proceed prior to prenup/marriage. We have only talked to our banker and she said a lot of baby-boomer retirees are doing similar to what we plan to do, to help the kids.
    Terry, sounds like we/son may need to see you to discuss prior to proceeding with any purchase.
    What would be the typical professional fee for these things thanks Terry ?
     
  8. Soy

    Soy Well-Known Member

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    Thanks MWI.
    1. I understand the growth is not cover and that was why I wanted to say interest only paid when house is sold.... hoping the interest would at least be in part with the growth...
    2.No this purchase is not his 1st so no FHO grant. It will be his PPOR I think may be best under his sole name
    3 Where are you in Qld ? Brisbane ?
     
  9. MWI

    MWI Well-Known Member

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    I am not a lawyer but used a lawyer in QLD and SYD for such matters including our estate planning. Have Pm'ed you.
    I am unsure how this is a strategy 'hoping the interest would at least be in part with the growth...'?
    What if we have negative interest rates like in some countries in Europe yet equity growths?
    Lawyers or such specialists will discuss or pose such other scenarios with you that you may have not thought about.
     
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  10. Trainee

    Trainee Well-Known Member

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    Make sure you and your son get the finance and legal stuff sorted out before he starts looking at property.
     
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  11. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    I charge $660 for a consultation and $990 to about $2600 for a loan agreement depending on how complex you want it. Half price for clients of my broker firm. I don't do prenups (binding financial agreements) but you are probably looking at $5k to $10k for one.
     
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  12. Marg4000

    Marg4000 Well-Known Member

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    A few points.

    A pre-nup may or may not stand up in court, but once a child comes into it then that can change everything.

    There have been reports in the press in the last few years of parents trying to enforce repayment of a long-standing loan to an adult child. Judgment has gone against them because, as they have not sought any repayment for many years, the “loan” is now judged to be a gift. Get advice.
     
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  13. thesuperman

    thesuperman Well-Known Member

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    Could it be setup as a repayment of $1 (or another amount) of the loan principle at year 5, then again the same thing at year 10 to avoid this issue?
     
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  14. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    A loan agreement can be 'refreshed' with a payment every few years or by acknowledging the debt in writing every few years.
     
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  15. Archaon

    Archaon Well-Known Member

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    What about a caveat on the title?

    @Terry_w
     
  16. MWI

    MWI Well-Known Member

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    That should be part of the deed of contract and executed.
     
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  17. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    A caveat is not a form of security really. It is just notification that someone other than the owner has an interest in the property. The interest would be an equitable mortgage in situations like this. The registration of a caveat can be easier than registering a legal mortgage though and it does give rise to some degree of priority over other non-secured creditors.
     
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  18. Soy

    Soy Well-Known Member

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    Dear all,
    Would like to give an update to where we are at.
    1. Our Financial Advisor (mainly for our SMSF) has told us that a number of her baby boomer clients have done similar to help out their kids as well, and they did it via a thing called Equitable Mortgage.

    2./Son has a friend lawyer (working in a Law Firm) who has also confirm that Equitable Mortgage is the way to go.

    3./Roughly my understanding is that it is a document drawn up and signed etc but we don't have to register it until the need arises.

    4./So son is reading up on Equitable Mortgage currently (to understand more but of course will then engage a professional to draw the document up properly)
    .
    5./Whatever way we go, once the document has been done I will post it up here as a sample- if allowed by Propertychat , hoping it could assist someone else if/when they need it.

    The least I could do, as I have been on and off this forum nearly 20 years since Somersoft time, and much appreciate its advice.
    Somersoft years ago gave us the courage to start on the property investing journey. We did make mistakes but I can say that it is the reason that our son now can "early inherit" a substantial sum to use towards the purchase of his home.
    And before you say that the son "should not be spoiled, he needs to learn to do it himself etc :)". It's OK. He has been doing it himself and is very responsible (has a few houses). We just want to give him the money because we can, and because we have a lot of pleasure ourselves doing so :).
    Thank you.
    Thank you Somersoft/Property Chat.
     
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  19. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    Sounds like you haven't received legal advice.

    An equitable mortgage is just a mortgage that has not been registered on title. It won't necessarily give you priority if someone else lodges a charge over the property that is registered - they will take priority.

    There are 2 issues posted a legal document
    a) copyright - make sure you have your son's lawyer's permission,
    b) liability for negligence if someone uses it and it doesn't do what you purport it does.
     
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  20. Soy

    Soy Well-Known Member

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    Thanks Terry.
    Yes correct. We usually try to find out and think about the subject a bit before seeing a professional. It tends to help us to be able to ask clarification questions and hence feel more confident that the decision is the right one.

    Would lodging a caveat on the title help ? If registering the mortgage won't prevent son from borrowing against the equity then perhaps it is ok to register it if need to.

    a)Thinking about it, probably lawyers would not agree for the document to be freely accessed, for financial reason at least, which is fair enough.
    b)WRT liability for negligence, wouldn't a disclaim statement be good enough ?

    Thank you.