Family loans done properly

A family loan is the form of help that most often goes wrong quietly. The money moves, everyone means well, nothing is written down, and years later three different people remember three different arrangements. A loan done properly is a loan that is documented like one: an agreement both sides signed, terms both sides can point to, and a record of what has been repaid. This page is about what that involves and why it matters to the lender, the tax office, a family court and an estate.

Write it down

A loan agreement between family members does not need to be long, but it does need to exist. The things it records:

• who is lending what to whom, and the date the money moved;
• whether interest is charged and, if so, at what rate and how it is calculated;
• how and when the money is repaid, whether in instalments, on a date, on the sale of the home, or on demand;
• what happens if a repayment is missed, and whether the loan can be called in early;
• whether the loan is secured, for example by a second mortgage or a caveat, or unsecured;
• what happens if the lender dies, or the borrower does, or the borrower separates from a partner.

A solicitor drafts it in an afternoon. The cost is small next to what an undocumented advance can cost later.

Interest or no interest

Both are common. An interest-free loan is simplest and is still a loan if the paperwork says so. Where interest is charged, it is income of the parent who receives it and goes on their tax return; the child cannot claim it, because interest on a loan for a home they live in is a private expense. A rate well below the market is not a problem in itself, but an agreement that no one ever intends to enforce is a gift in everything but name, and it is better to call it one.

What the lender sees

A repayable family loan is a liability. Lenders commonly ask whether any part of the deposit is borrowed, and a loan disclosed on the application is tested like any other debt: its repayment reduces the surplus the lender is prepared to lend against. The family-help planner shows the combined monthly figure a loan produces. Some lenders will not accept a borrowed deposit at all on a high loan-to-value loan; others accept it if the family loan is interest-free and has no fixed repayments. A broker can say which. Presenting a loan as a gift to get a better outcome from the lender is the one thing not to do: it is a misstatement on a credit application, and it also undermines the loan agreement if the family ever needs to rely on it.

If the child's relationship ends

On a separation, the family court divides the couple's property, and money that came from one side's parents is looked at closely. Whether it was a gift or a loan can change the outcome. An undocumented advance with no repayments and no expectation of repayment tends to be treated as a gift and a contribution by the child; a documented loan, with terms and a repayment history, is more likely to be treated as a debt of the couple that is repaid before the rest is divided. The paperwork does not decide the case on its own, and a court can look through an agreement that no one ever acted on. A loan that was written down and actually serviced is the one that holds up.

If a parent dies

A loan is an asset of the parent's estate. Unless the will says otherwise, the executor is expected to collect it, which can put a sibling in the position of asking for repayment from a brother or sister. Parents who intend the loan to be forgiven at death, or to be counted against the child's share so the other children are treated equally, can say so in the will; parents who intend the opposite can say that too. Either way the will and the loan agreement need to agree with each other, which is a conversation with the solicitor who drafts both.

The record

Whatever the terms, both sides keep a record: the agreement, the transfer, each repayment. A shared spreadsheet is enough. Its purpose is not suspicion; it is that memories differ and documents do not, and every party who might one day ask about the loan, from a lender to an executor, will ask for the documents first.