LESSONS WHEN LENDING FROM THE BANK MUM AND DAD
From parents helping their children into their first home to a sibling helping another sibling start up a business, there are many reasons why whanau might want to lend money to each other. However, despite having the best of intentions, there is scope for things to go wrong if the loan is not properly documented. You may feel that you can rely on the word of a family member that they will repay the loan when you need the money or when they are able to pay it back, but unfortunately this is often not the case.
Let’s look at Jane’s scenario to see where lending to family members can go wrong and how you can be better prepared if you find yourself in a similar situation.
Jane helps her daughter Sarah
Sarah is in her thirties and keen to buy her first home, but she doesn’t quite have enough savings for a deposit. Jane has savings in the bank for her retirement and wants to help Sarah. Jane wishes to loan, rather than gift, the money to Sarah because she needs the savings for her retirement. Jane also doesn’t have the money to be able to give a similar gift to her son, Ed and she wants to keep things fair between her two children.
However, Sarah’s mortgage broker suggests that the money is not documented as a loan as this will affect Sarah’s eligibility for a loan with the bank. He advises that it would be better to call it a gift. Jane is unsure. She trusts Sarah but is worried that this may not be a wise decision. In the end, Sarah receives $100,000 from Jane and neither of them sign any documents recording this as a loan.
Sarah defaults on her mortgage
After Sarah is made redundant, she is unable to repay her loan to the bank. Unfortunately, when the bank sells her house by mortgagee sale, the sale proceeds only just cover her debt and there is nothing left over for Sarah to be able to repay Jane.
Jane, who will soon turn 65, is starting to think about retiring and is counting on Sarah repaying the loan to strengthen her savings, as she will soon be relying on the pension for her weekly income. Sarah now must break the news to Jane that she cannot repay the $100,000. Jane has also recently completed a Will by which Sarah and Ed equally receive her estate, as Jane was counting on Sarah repaying the loan soon. It is very important to Jane that she equally benefit her children.
What could have helped Jane?
Jane and Sarah should have sought independent legal advice when they first began discussing the loan. Their lawyers would most likely have been able to advise them on a way to document the loan to satisfy Sarah’s bank and ensure Jane’s interest was protected, or if Sarah’s bank was not satisfied with the funds being a loan, then Jane would have at least received advice as to the possible risks of gifting Sarah the money. She could have made an informed decision about whether to give the money to Sarah.
While you may wish to keep things informal between yourself and your family on the basis you trust each other to keep any promises made, unexpected circumstances can arise that are beyond either party’s control. An agreement to record the loan can be simple and relatively inexpensive to prepare; giving you and your family confidence that you are on the same page regarding the terms of the loan and the process for dealing with any issues that may arise.
How can we help?
If you are considering loaning or gifting money to whanau, WRMK Lawyers’ experienced team may be able to help. If you’d like advice about your property, relationship property, or estate planning arrangements, our friendly team of experienced local life planning lawyers are happy to help.
Our thanks to Courtney Clarke for writing this article, which was first published in the Mangawhai Focus in November 2023.
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