Has anyone ever set up a private mortgage from a family member for an investment property? The family member has enough cash to lend the entire amount of the property and stamp duty. Are the interest payments to the family member tax deductible for me (obviously the family member would need to declare the income, but I have no control over their finances)? Are there any cons to this approach? I haven't gone to a bank, because this arrangement would let me borrow 105% with interest only. I wouldn't get these terms from a bank. What sort of things do I need to watch out for?
Yes If done properly it would be Yes, there are. You should get specific legal advice. You could get these terms - 105% loan if you had useable equity in another property. IO too. death, bankruptcy, incapacity, family law, proper documentation, proper conduct, family relationships. etc
Yes - they're considerations. Yeah - but no need to stake another property, if I'm getting good terms somewhere else. Can you elaborate on what "properly" entails?
If your family member lends money from their company to you: you will have a minimum interest rate and you cannot go interest only. if the family member lending the money has a government pension the loan will become an asset. The main reason why succession fails is not due to poor legal and tax advice (that is only 3%) of the reason. The main reason is poor communication and a lack of trust - so your family overall will need to discuss the loan loan more broadly to tackle trust and communication.
I once had a family member seek to make a private loan to my wife and myself in lieu of our bank loan at that time. They were older (a grandparent). We were concerned they may die and then the loan turns into a family issue and so declined the offer. They died 6 months later at a time after I was retrenched so refinance would have been a major issue. We didnt actually stand to benefit as the rate was "market" and only saw concerns. We were grateful aftre they passed we hadnt taken up their offer as one benenficiary would have been quite demanding of their inheritance as soon as possible. Many private loans are also just IO and may not diminish the debt which can balloon the debt reduction. If the lender is not an Australian tax resident withholding tax issues also affect the loan and and its interest deductibility. The agreemnet should also clearly indicate the currency of the loana nd exchange rate issues. For a related party loana solicitor can assist the formalitties but the lender will generally need independent legal advice.
I see this as a benefit - I wouldn't be able to get these terms from a bank. Not an issue for us. Thanks
If the debt is subordinated to say a bank loan e.g. there is a primary mortgage and the bank takes security over the asset, it may be harder to provide security to the family member making the loan. So the interest rate needs to reflect this high risk, along with the lack of liquidity e.g. they may only be paid the principal once construction has been completed and the end product sold / refinancing occurs. Remember lenders are like any other investor - they want a return ON and eventually a return OF their investment.
It need not reflect that "additional risk" as that is very subjective. It could be a element of a scheme where there is a tax benefit from such a high rate. However for arms length lenders and mezzanine finance that rate may well be high.
I have seen all sorts of agreements. Not uncommon that they contain ratcheting clauses eg initial rate is XX% but after a specified date it may become a higher rate as a resogniftion of a default to complete on time. Its intended to encourage things to be completed on time. I have seen people use a high rate for a spouse when its arguable its a scheme element and aloso seen quite legit lender of last resort arrangements. Certainly an area where the drafting of any agreement should have tax / leal advice from a solicitor.
The issue is that unlike cash at bank, or a term deposit, the ability to be repaid can be limited. So there needs to be a penalty for not repaying in the agreed time frame / incentive to repay.
Legally there doesn't need to be. Whether there should be will depend on the circumstances. In some instances it can be an asset protection strategy if the borrower doesn't need to pay back the money at law.
