Homemade loan tips

With so many decisions to make these days, the “family first” rule of thumb can make things simpler. Especially money choices. What’s most important? “Family first” makes it easy to prioritise.

True, you might not have immediate family around, so your rule might be “whanau first” or “future family first”. Or even “future you first” can be helpful as you make snap decisions about how to spend money.

Try this at home

Do you lend among your whanau? Or borrow from your local BMD, the Bank of Mum and Dad? What do you think about kids borrowing from each other?

Just this week I came across one family figuring out how best to loan an “early inheritance” to four siblings, and another exploring whether to redirect a mum’s term deposit towards a son’s first home. My own parents have been able to downsize from our childhood home and help my brother and his family with a loan to buy their first. So far so good.

A huge intergenerational transfer of wealth is underway, with asset-rich Boomers looking to help the next generation step onto the property ladder. With the housing situation these days – and not just in Auckland – they may have to.

To deal with skyrocketing prices and bank deposit requirements, help from parents is an obvious solution for more and more of us. In Auckland, some estimate as many as 60 or 70 percent of borrowers get a boost from parents, and that goes even higher for borrowers under 30.

Homemade loans should be a win-win for family: a larger house deposit makes mortgages far less expensive, and loans to children can mean a better interest rate for parents than they could get from the bank.

A debt in the family

But it can be tricky. Debt always brings risk with it, for both lenders and borrowers. Banks usually prefer to see gifts rather than loans from parents, to ensure the borrower isn’t over-extending themselves financially.

Parents can be overly generous to the point of straining their own finances. The agreements can be loosely structured – a “pay it back when you can” sort of thing – creating future misunderstandings.

Or, in an effort to treat everyone fairly, a parent can loan out equal amounts to all siblings without taking into account each child’s ability to repay. The child’s situation can also change suddenly due to redundancy or separation.

My own extended family has seen decades-long difficulties between one side and the other when an inheritance was “borrowed” and invested and not repaid for what seemed like forever. When it finally was, the strain eased.

Psychologists have shown how money can come between us. It can certainly affect the quality of our relationships, whether because of issues of fairness, or the strain from doubting whether we’ll ever be paid back.

Since these are the relationships that last lifetimes, they need protecting, especially from getting bruised by a money deal sealed over the dining room table.

These days there are a number of options at the bank for parents to help children without overly straining their own situations, and these are worth exploring. Offsetting bank accounts, for example, mean parents can use their money in the bank to guarantee part of the loan and avoid taking on more of the risk than they are comfortable with.

Top considerations with homemade loans

• Family first: prioritise relationships and wellbeing.
• Avoid straining your finances or your parents’ position for retirement.
• Get quality independent advice on structuring the deal – from someone who doesn't directly benefit (i.e. not a lender).
• Make it official: put it in writing and make it a legal agreement.
• Communicate: It helps for there to be clear communication with everyone whom the agreement will affect.

In all of these homemade loan situations, the “family first” rule applies. These days I much prefer my children to simply gift each other money from their giving accounts rather than running around nagging each other to pay back a loan. It’s far better for the whole family.