Borrowing from parents to payoff mortgage

7066 Views 17 Replies 10 Participants Last post by canadianbanks, Sep 2, 2009

sagsal

Discussion Starter · Jun 30, 2009

Have a thought and would love some opinions

what if I borrowed enough from some flush parents to payoff our mortgage (it is quite large) and came to an agreement to pay them off over say 30 years with a fixed rate of say in between 4.5 and 5%, is the interest they receive on their loan to us taxable by CRA?

They complain about small yields in safe investments - we are as stable as you get interms of jobs - and I know what my rate is for decades not half decades...

Thoughts??

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MoneyGal

· #2 · Jun 30, 2009

Yes, the income they would receive from you is taxable. I'm curious to know why you think it would not be!

OTOH, if they gifted you the money (as, for example, a "warm-hands" inheritance), the funds are not taxable in your hands and, as they do not give rise to any interest for them, there are no tax consequences for them arising from the gift, either.

However, there are some tax niceties that you should be aware of if you decide to go the gift route (principally the potential effects of the Lipson decision at the Supreme Court) -- however, given that you haven't even raised the issue of a gift instead of a loan, I'll hold off on that.

There's also family law issues associated with gifts of money used to pay off mortgages on principal residences. However, once again, you haven't even raised this. I must be a little bored at work today.

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FrugalTrader

· #3 · Jun 30, 2009

What MoneyGal said.

As well, why would you get a loan from your parents at 5% when you can get a fixed mortgage rate lower than that?

Cal

· #4 · Jun 30, 2009

Yeah....get a 5 year now @ 3.5%....then in 5 years get the loan for the remaining from your parents, rates will be higher then, so a 4.5-5% loan could look really good to you then.

OhGreatGuru

· #5 · Jun 30, 2009 (Edited)

sagsal said:
Have a thought and would love some opinions

what if I borrowed enough from some flush parents to payoff our mortgage (it is quite large) and came to an agreement to pay them off over say 30 years with a fixed rate of say in between 4.5 and 5%, is the interest they receive on their loan to us taxable by CRA?

They complain about small yields in safe investments - we are as stable as you get interms of jobs - and I know what my rate is for decades not half decades...

Thoughts??

Very risky for the parents. 30 years may be beyond their life expectancy. Lending big money to relatives is fraught with risk. How are they going to collect if you default for any reason?

The fact that you are even thinking about a 30 year mortgage suggests you are living beyond your means.

OTOH: Having said all that, there are societies and families where this is done. The mortgage should be a debt against any share you expect from your parents' estate (if that share is large enough), or alternatively the outstanding amount needs to be payable to the estate on your parents' death. They need to discuss this with a lawyer and/or estate planner. But economically, it still does not make sense for them to lock into a fixed 30-yr. term at those rates, unless they were planning to make it renewable periodically.

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George

· #6 · Jun 30, 2009

I think it'd be a dumb idea all around. It is never a good thing, IMHO, to mix money relationships with familial relationships.

If anything goes wrong with the "loan", you risk souring the relationship with your parents. It's one thing if they're willing to give you the money as an early inheritance, but it's quite another if it's structured as a loan with an expectation of payback.

sagsal

Discussion Starter · #7 · Jul 1, 2009

I can guarantee I am not living beyond my means and no idea is a dumb idea - just looking for thoughts

Lets stick to what we know!

sagsal

Discussion Starter · #8 · Jul 1, 2009

I am curious OHGreatGuru - are you one of the hoards of financial advisors who provide useless general advice to the masses?

OhGreatGuru

· #9 · Jul 1, 2009

No. You asked for opinions. I gave mine. But I suggest you look at the total repayment costs for 15, 20, 25, and 30 year mortgages, and tell us why you think a 30 year mortgage is a good idea.

stephenheath

· #10 · Jul 2, 2009

One thing to consider is that you are locking in your rates for 30 years, but you are in turn locking in your parents rates. Right now the best GIC rates are around 3.8% (National Trust via brokers), so it would be a good deal... but if interest rates climb again they might be able to get 5 or 6% from GIC's... and if rates shoot up around 15% or higher as they have I believe twice in the last 30 years (oil shock of the late 70's, and then again mid 80's?) then they would be missing out on some significant returns, as well as find themselves falling behind against inflation, although you would definately be ahead of the curve.

Over the last decade my grandmother has often suggested that we do something similar, but especially since I'm a fan of variable rates, there has never been a time when I wasn't paying the bank much less in interest than she was receiving from GIC's, so we've never done it. At the moment even if all her GIC's were to reset today, she'd be getting 3.8%, and I'm paying 1.5%.

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sagsal

Discussion Starter · #11 · Jul 2, 2009

Thanks for the well thought out opinion

Pretty much what I had thought but always good to get other opinions

Shayne

· #12 · Jul 10, 2009

My suggestion is to always play by the rules. The chances of C.C.R.A. finding out about your arrangement are slim, but if they did and your parents are not claiming the interest they are earning they will be investigated.

sprocket1200

· #13 · Aug 23, 2009

I agree with the advice here. why pay 5% and why have a 30yr mortgage. if what you say is true that you are not living beyond your means, then you should be able to easily pay off the mortgage in 10yrs...

canadianbanks

· #14 · Aug 27, 2009

Look it's really simple. If don't borrow the money from your parents you will take a huge hit when interest rates increase substantially (will happen sooner than most think). If you borrow the money from them at 5% they'll be taking the hit when interest rates go up (missed returns).

George

· #15 · Aug 28, 2009

canadianbanks said:
Look it's really simple. If don't borrow the money from your parents you will take a huge hit when interest rates increase substantially (will happen sooner than most think). If you borrow the money from them at 5% they'll be taking the hit when interest rates go up (missed returns).

I think it's a bit more complicated than that. You're only looking at the interest rates, and making the assumption that rates will jump. There are a whole host of social and emotional aspects to the situation that make it far more complex than you suggest.

sprocket1200

· #16 · Aug 29, 2009

George,

this is the Canadian Money Forum. we leave the pyscho babble to another forum. I am feel qualified as I am married to a psychotherapist. I am her biggest project yet!

If the OP was not scared off from the social and emotional aspects of this type of loan, then they are probably ignorant or just inconsiderate of their parents.

then there are the personal issues of self confidence, independence, etc. let alone why their parents don't think they can get more than 5% on the investment anyway...

George

· #17 · Aug 30, 2009

sprocket1200 said:
George,

this is the Canadian Money Forum. we leave the pyscho babble to another forum. I am feel qualified as I am married to a psychotherapist. I am her biggest project yet!

If the OP was not scared off from the social and emotional aspects of this type of loan, then they are probably ignorant or just inconsiderate of their parents.

then there are the personal issues of self confidence, independence, etc. let alone why their parents don't think they can get more than 5% on the investment anyway...

I think my point stands. Borrowing money from family members puts the family relationship at risk, particularly if the loan isn't paid back. It makes family gatherings into awkward events.

There's more to it than just looking at the money and interest rate differentials. Yes, this is the Canadian Money Forum, but the "personal" aspect of personal finance is as important as the "finance" aspect (if not moreso).

canadianbanks

· #18 · Sep 2, 2009

George said:
I think it's a bit more complicated than that. You're only looking at the interest rates, and making the assumption that rates will jump. There are a whole host of social and emotional aspects to the situation that make it far more complex than you suggest.

I was talking about the financial aspect of the question. Don't you think there will be a high inflation, with all the money printing going around? After all, the owners of capital will want to be compensated for the loss of purchasing power and make money on top of that, which will force rates much higher. It's only a question of time. If the government and the central bank manage to keep the fees low somehow, then look at what happened in Japan with their similar policy. Their RE prices are still more than 50% from the top after many, many years of low interest rates.

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