How to protect a third party who loans money to help purchase a property?

mad__llama on 10/06/2014 - 15:27

Hey all,

I am starting to think about buying property but due to a number of factors there is a low chance of being able to secure a mortgage for the full amount. Luckily my parents have very generously offered to loan me the shortfall to help me get a foot in.

If I decide to borrow money from them, how would I protect my parents by making sure that no matter what happens they get their money back before anyone else (e.g. I get sued/declare bankruptcy/get divorced/default on mortgage/die in a car crash etc.)

Any suggestions appreciated…

Financial

Comments

  • pjetson on 10/06/2014 - 16:55
    +2

    I'm not a lawyer, and you really should be talking to one. As far as I am aware, unless a person is a party to the mortgage, they can have no claim on the mortgaged property. The bank holds the title, so the bank has control over the property until the loan is repaid.

    In any of the circumstances in your message except death, I believe that the worst that can happen is that you can be forced to sell the property to pay your debts. If that happens, the bank will get their money first, then everyone else gets to fight about what (if anything) is left.

    If you die, and no-one else is a party to the mortgage, the house will be sold and the bank will be paid, same as above.

    If someone else is a party to the mortgage, and they can continue to pay the loan, I believe that the bank will probably allow the loan to continue, although they may need to change some documents, and that will no doubt cost money.

    So, I think that the only way your parents can have any call on the house at all is to be co-mortgagees with you. But, as I said, I'm not a lawyer, and you definitely need to consult one.

    • mad__llama on 10/06/2014 - 23:39

      Great advice, cheers!

  • lisss on 11/06/2014 - 00:24

    No bank will give you a loan unless they're the first mortgagee. Your parents will always rank behind the bank.

    If your parents are a party to the loan, this exposes them to significant risk as they can be liable for the whole amount. They will need to get independent legal advice. Any bank will require this. There is also unlikely to be any point to this arrangement. It wouldn't actually help them to get their money back, it would just leave them on the hook for significantly more money with no upside.

    I suspect that the terms of the first mortgage (the bank's) will prevent your parents from being able to have any security interest in the land or any of your other significant assets. They will always be unsecured creditors.

    The best way you can protect your parents is by paying their loan off sooner rather than later, but assuming their loan is interest free or at low interest this would be at a cost.

  • Baysew on 11/06/2014 - 14:38

    I don't think any lender would be to keen on granting a loan when you don't have a genuine deposit.

    Getting sued and death can at least be covered by insurance.

  • anna10 on 11/06/2014 - 17:37

    I read an article on this not so long ago, esp in ref to divorce. They said to draw up a loan agreement in your name only from the parents. Then you make regular repayments which can be very low so it looks like a loan and not a gift that yr partner can claim on in a divorce.

  • 729fx on 12/06/2014 - 21:34

    As Baysew said, you can take out life insurance and indemnity insurance. Besides that I am not aware how else you could guarantee they would get their money.

    If your parents loan you money, they will need to sign a statutory declaration to say the money is 'gift' and not a loan.

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