Everything you need to know about lending to your family
Financial solidarity with relatives can provide a welcome helping hand in the financing of a property acquisition. Explanations and user’s manual re the family loan.
Rather than giving and definitively and irrevocably extracting a sum of money from their investments, some parents and grandparents are choosing to opt for the family loan. This solution that costs the lender little, can help the borrower finance their real estate project (purchase of principal residence, professional space, etc.). For the bank, this sum can serve as a down payment, useful to the buyer when negotiating a good interest rate.
The conditions of the loan are open, and all sorts of figures are possible. For example, the loan can be made at a “gift” rate of interest – very low or none – or indexed to inflation.
The conditions of this loan must be drafted in the most precise fashion possible in order to avoid them being challenged at a later date.
Written, dated, and signed by the borrower, this document sets out the sum loaned (in figures and written long-hand), the date, the repayment schedule, and the interest rate.
It’s important to consider what will occur in the event of the death of the lender, or the borrower, and to provide for whether the heirs are to be held to pay back the debt or not. It’s also necessary to consider what will happen if the loan is not reimbursed.
This written contract can be executed by private signature or before a notary.
There must be two original copies, one for each party. This written evidence is indispensable to prove the existence of the loan.
In order to avoid a situation in which this generous gesture turns into a poisoned chalice or leads to disagreement within the family, better to take a few precautions. The lender and the borrower must together draft an act called the “acknowledgement of debt”. This document will avoid this parental gesture being later classed as a cloaked gift and present an inheritance issue.
Note: it’s advised that the loan in question be registered with the tax office. The cost of doing so? 45 to 75 Euros. Thanks to this registration, the debt becomes enforceable against the borrower and in the case of death will be a liability of the estate.