Be Careful When Lending to Family
Courtesy of Dynamic Mutual Funds, Posted 22 Sep 2014
A colleague of mine recently found his 30-year-old daughter living back at home. A nasty divorce had sent her running back to mom and dad for both emotional and financial support.
According to Investment Executive's Money Planner magazine, the likelihood of young men and women returning home after leaving to strike out on their own has tripled in the past 50 years. The magazine says one in three 30 year old Canadians will return home after leaving. Whether its skyrocketing debt loads from post-secondary education, relationship breakdowns, or the inability to find a well-paying job offspring are flocking back to formerly empty nests.
Granted some parents love having their kids living back at home and wouldn't have it any other way. Others can't wait until the kids are gone for good. Quite often these more independent parents will consider throwing a financial lifeline to their kids by helping them buy a place of their own. But, lending money to family members can be risky business and could end up affecting your financial security.
For example, if you co-sign a mortgage, you are just as liable for the mortgage payments as your son or daughter. If something unexpected happens and your co-mortgagee can't make the payments, the lender can come after you. If you are on a fixed income, these extra mortgage payments could dramatically affect your lifestyle. You can, of course, sell the home to pay the mortgage off, but that takes time and there are numerous costs to selling.
If you decide to lend your dependent child the down payment for a purchase, be sure to visit your financial advisor to get advice on how that loan should be structured. If it truly is a loan and not a gift, you should sign an agreement. What would happen if you pass away and there is no agreement about the loan being paid back to your estate? Is the obligation wiped out on your death? Does that mean your other children won't get their share of that amount of money? Will that cause problems between siblings?
It's tricky territory lending large amounts of money to family members. Always be sure to get financial and legal advice to ensure that your bottom line is protected while helping out those you love (and getting them out of your house!)