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Should We Invest With Family?

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Contributor:
Mary Holm
Mary Holm

Question:

We have a mortgage of approximately $200,000 with a bank, at approximately 7 per cent. My in-laws have money invested at a bank with interest at approximately 5 per cent.

Would it be practical for us to work out a legal contract together and they invest their money with us at a rate of say 6 per cent? Can you see any issues around this scenario?

Answer:

It's time for a family conference, at which you would need to discuss all of the following gloomy possibilities:

What would happen if you or your spouse - or even both of you - lost your jobs or had health problems and were unable to make payments to the in-laws for a period?

Is it possible that someone could sue you or your spouse and you lost your house? If that happened, what would you do about your debt to your in-laws?

What if your marriage ended and you wanted to stay in the house while your spouse moved elsewhere? Would your in-laws be willing to leave their money in the house? If not, would you be in a position to get a new mortgage?

What if your in-laws decided, after a while, that they wanted to spend the money, perhaps on a health problem or family financial crisis?

What would happen if you or your spouse died, or one or both of your in-laws died, while the loan was still outstanding?

All of these issues could be addressed in a contract. But before you go to a lawyer, it would be wise to make sure you all agree about how they would be handled.

Note, too, that there's not a huge amount of money at stake. You would pay $2000 a year less interest, and your in-laws would earn $2000 more interest. And for them, the extra money would be taxed if they do the right thing legally and declare the income. Weigh up the gains against legal fees and the hassle of setting it all up.

Also, if your mortgage is fixed rate, there may be an early repayment penalty. And if it's not fixed, consider what would happen if interest rates keep dropping. While your in-laws' bank account interest could be expected to drop, too, how would you handle a rate change?

If your spouse has any siblings, it would be a good idea to discuss it all with them. The harmony in many a family has been disrupted because one child got a better deal from the parents.

It might be best if the in-laws offered to make loans of the same amount, at the same interest rate, to all their children. Some might turn down the offer, but it's good if they all have the same opportunity. If the parents died while any of the loans were outstanding, those amounts could be subtracted from the borrower's inheritance.

Still like the idea? Fair enough. It does have appeal. And, under the right circumstances, it could give you and your spouse flexibility about repayments, which could prove really useful.

 

Mary Holm is the author of bestselling books on KiwiSaver and personal finance. She is also a highly praised seminar presenter. Her written advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following that advice.     

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