January 18, 2010, 5:44 am

Dealing With Money And Family

by: The Financial Blogger    Category: Assets and Net Worth,Pay off your Debts
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The very bank that ever exists for any 10 yr old kid is “The Mom and Dad Bank – funded since your birthday”. This is not always the most generous or the most comprehensive bank that ever been (have you ever dealt with a generous and comprehensive bank anyway?), but this is the only bank that will give/lend money when you are young.

As you grow up, “real” banks will open your doors and allow you to apply for a credit card, a student loan and ultimately for a mortgage. I was 24 when I bought my first home. We just had our son and we were looking for a nice place for him to grow up. Back then, I was able to gather interesting cash down (thx to leveraging!) but I was still missing money to reach the 20% cash down required to avoid CMHC insurance premium. The 20% cash down was also giving me access to the most flexible type of mortgage ever: the Home Equity Line of Credit (HELOC). So this is why I have turned (once again!) to The Mom and Dad Bank.

A Feeling of Guilt

While I was very excited to purchase my first home, I was feeling guilty that I couldn’t buy it completely on my own. We have discussed this issue with my parents and my wife to make sure that everybody agreed on the very same thing: They would lend us the money for 5 years according to the mortgage interest rate in place (they were mortgage their rental property to lend me the money). Therefore, I was free to do whatever I want until November 2010, the date that I have to give them back the money (along with the interest).

It is touchy to mix money with family

While I would have preferred to not borrow from my parents, I must say that everything is going well so far in term of relationship. They were happy to help us out and they are not waiting to get the money back. However, I definitely want to maintain my good relationship with them and I want to pay them back fully at the end of the year as I don’t want to jeopardize everything.

I think the key was to keep a simple and clear agreement with everybody. We have 5 years to pay them back, the interest rate and date of repayment are known and agreed by both parties. Even though you are dealing with family members, I think it is important to not forget that you are also dealing with money. This is why following such contracts is very important to me.

Spending while you are owing

I think the worst part about owing money to someone close is that you feel bad of spending money on vacation, renovating your home or on a new car (the situation is a bit more complicated regarding the car issue…). Each time you spend money, you think that you might have put this amount aside and pay back a debt. I guess this is why I am looking to pay back my parents completely according to the original term of our agreement.

What if I can’t?

Gathering 31K in a single year seems almost impossible at first glance. While I was regularly putting money aside during the first 4 years, I ran into a few speed bumps that made me spend this money in one way or another. I have always thought I had enough time to pay them back “later”. But “later” is about to come to an end as November is getting closer and closer.

Honestly, I don’t think about not paying them back completely yet. I think that I could still manage to gather enough money before November through my online company, my savings and a potential salary increase (yes, I am working on another one at the moment).

Any Thoughts?

I would be curious to know if you have borrowed money from your parents or friend? How you have dealt with it? Did you reimburse in time?

image source: kyz

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Back in 1998 my fiancé and I went up to Tremblant for a visit, walked into the resort real estate office and were hooked. I had just read Boom Bust & Echo and The Roaring 2000’s (how wrong was that!) and so we decided we would try to find a way to buy an investment property. This was even before we owned a home.

To come up with the downpayment we convinced my parents and her parents each to take out a mortgage (for her parents their house was already paid off, for my parents it was a second mortgage) to give us the downpayment. My would then pay their mortgages while at the same time we would pay the main 75% mortgage of the property. This worked out because we were still living in a small apartment and we hadn’t any kids yet. Four years later we renegociated the main mortgage on the property and we were then in a position to pay off in full both mortgages that our parents took out for us.

The only cost for our parents was the risk that we wouldn’t make the payments while they had a mortgage in their name, but it all worked out. This is how we bought an investment property with no money down.

The condo up at Tremblant hasn’t been that great an investment after all, but we’ve had a good time making use of it.

erm… ‘We would then pay their mortgage payments’ is a correction of ‘My would then pay their mortgages’

If you bought in 2005 you should have enough equity to pull some out if you are short at all. Not ideal, but your debt would be paid.

I was fortunate (or unfortunate) depending on how you look at it. My parents did not have the financial resources to lend me money so I have never owed anyone except a bank.

On the other side of the coin it can be quite frustrating dealing with young adults when they are not responsible as you. Last year we paid off a credit card for my spouse’s 24 year old because we could not stand to see what we being paid in interest.

We had no issue helping out like that but it is frustrating when the agreement to pay back the money has not been honored. Even more frustrating is knowing that the card has again been extended to it’s limit.

It will be a learning experience for us and him as he will no have to dig himself out of his own hole.

I think borrowing from family is a great proposition given the right family dynamic. However, nothing separates a family as quickly as a disagreement over money. If the banks going to pay 3% for a GIC, and the mortgage is 5% – why not meet in the middle at 4% – everyone wins.

@ phil,
Are you renting the condo from time to time? At least, Tremblant is a great place!

@ dr stock,
I wanted to be fair with my parents and pay their mortgage rate.
I am also lucky to be their only child so they don’t have to bother about what the other children 😉

I’ve never really borrowed money from family or friends in a large capacity. But I have WORKED for family and friends by doing home remodeling and repair work for them. Sometimes this goes very well, other times this may not go as well. It’s always a little bit awkward, especially when it comes down to “settling up”. Working for family and friends is sometimes not as fun in my opinion.

@ No Debt Guy,
Yeah, I rather refinance my mortgage to pay them back than not paying them back at all!

I’ll probably end-up by taking 10K out of my equity and pay them back on time!

by: Generous_Girl | January 18th, 2010 (9:18 pm)

It can be sometimes dangerous to lend money to your family or friends, especially when the person is irresponsible. You certainly do not want the loan to become a GIFT… Great it went well for your parents (you seem like a good guy), but sometimes relationship can deteriorate quickly.

I’ve lent 5K to one of my friend (NOT ANYMORE) and still waiting for the money. At that time, I wanted to help him… I should have write a contract and being clear up front. He’s always promising that he will soon get me the money…blablabla I don’t want to see his face because he’s always finding some excuses…

Hold the phone, I think I spoke before thinking. Refinancing would not be the cheapest way to go if you are only needing $10K. The penalty, legal fees and possibly an appraisal would like not make it worth your while.

A $10K line of credit would be cheaper if you were able to pay it off within a year.

I have never borrowed and never lent money. But I know a few people that borrow money from their parents to buy a house. Parents will always love you and will help the way they can in order you to succeed. It was really nice from your parents to lend you money to “start your life” and buy your own place.

But now, it is also important to show your parents that you are mature enough to honor the loan. Yes, pay in time 😉

Would it be a good way for parents that do not have the money to lend, to loan for you with a better rate (because they have an historic of credit) that you may have if you are asking directly to the bank?

In USA, favorable tax laws will let each parent gift a certain amount without tax consequences… is it the same in Canada?

It is the same in Canada, but there are no limits.

Hehe tks NoDebtGuy! No limits thats even better! Will have to ask my parents :p

Nope, no limits. 🙂 Your parents just have to supply a gift letter and you show the bank that the funds have been deposited in your account and you are good to go for your down payment.

As you know things change and this “gift” contract can change as well. It is not uncommon for the recipient of the gift to repay it. The bank knows this happens, but doesn’t want to know, if you know what I mean. 🙂

I had to refinance 28k in debts. I had a choice. Doing it wit my financial institution over 10 years at 13%, or with Mom and Dad Bank over 6 years at their mortgage rate, about 6%. I discussed this agreement on my blog last october. It was very painful, but not to them. They were horrified when they knew what my bank was offering me, they couldn’t let this happen. I repay on fixed instalments, 26 times per year (every two weeks), and yearly if I can make it, I have the possibility to do a payment on capital (as with a normal mortgage). So, different from you, at the end of the delay, my debt will be (normally) entirely paid back to Mom and Dad Bank. But in my budget, it is like having another car to pay for the next 6 years. There is no perfect solution. But parents being able (financially and emotionnally) to put so much trust in their children is admirable I think. I hope I will be able to become like them as I grow as an adult and as a parent of 2 princesses.

By the way, your blog is really nice. I discovered it recently with help of a friend (CC, mesfinancesperso.com). Keep up the good work!

[…] talking about how to deal with money and family yesterday, it is now time to take a serious look at my options in order to pay off the loan from my […]

by: The Financial Blogger | January 19th, 2010 (5:47 am)

@ No Debt Guy,
I am lucky enough to have a home equity line of credit. Therefore, it would only cost the appraisal fee (no penalty and I am not over my registered amount yet, so no legal fees)

@ One Day,
My parents actually took a mortgage on their rental property to lend me this money, this is why I am paying them back with interest.

@ Mama Zen,
Yeah, I got cut with the “don’t make a payment until 2010” “promotion” 😉 I should have made monthly payments… things would have been much easier!

@The Financial Blogger,
What a good promo! 😉 Hell I’m happy that I hadn’t got that «chance». Some days I would prefer not having to pay this amount at that pace, but overall, I do prefer it that way.

Yeah I worked «pro bono» for (very close) friends too… without knowing that it was going to be «pro bono» 😉 I’ll never do this again, believe me.

Hi TFB – just found your site… good post.

Yes – family & finances don’t often mix. Things can get emotional so we took a very professional approach…

When I was starting out – I bought a condo in downtown TO – I was single then and the bank was happier if I had a co-signer. My parents offered to help me by providing me with a loan. We settled on the rate as Dr. Stock has suggested by meeting in the middle between the GIC rate & mortgage rate. We set it up a payment schedule & a promissory note to pay (which I had my lawyer do up when closing on the condo).

Several years later, when my fiance (at the time) and I bought our current home, I sold the condo – paid out the balance of the loan.

Additionally, we agreed that the loan would not be the subject of casual conversation and as long as I repay my debt per the schedule, there would be no discussions about my “other” expenditures.

A few years back, when I was travelling a lot, things were a lot tighter and I was lucky enough to get loans from both my parents and best friend. Both were very very generous about it and even though they were short term loans, I think the key was that it was clear when the payments would be made back.

But yes, no doubt it can bring up tricky situations and I’ve been happy to not have to borrow money from friends & family since then.

Actually, I might be in this situation very soon as my parents in law have offered to loan us money for our first home. I’m still a bit unsure about it as well as all of the pros and cons.

For example, I would obviously make repaying them a priority, but I would not want to feel guilty if I’m leaving on holidays to Europe for example. So just unsure how to go about this. Any tips?

@ mama zen,
Yeah, who would think that a financial planner would fall for that kind of tricky offer?
@ Alain,
I think the key is to set the rule clearly at the beginning. It is important that my parents didn’t expect to be paid back before 2010.
Then, there are no frustrations (as long as everybody respects their engagement!)

What happens when you are the “Dear Son/Daughter Bank”? Money may never be repaid. Could be a future discussion?

No one is totally immune to what appears to be a great deal, no matter what your expertise is… I don’t remember where I saw it on the blogosphere, but I bouth Ellen Ruppel Shell book (Cheap: High cost of discount culture). She made a very good studies reviews about this kind of phenomenons, interviewed lot of people. Along with 4 hours week by Ferris, this book is my must read of 2010 to better understand my incomprehensible «financial reactions» since I’ve been an active consumer…

as TFB said, why don’t you discuss this clearly with your parents in law and your wife? It might be better to do it before makin an arrangement than after (as I did). Even if you get along nicely with your in-laws, financial problems can put lot of pressure on a relationship… and imagine your wife stuck between you and her parents. A good discussion and written agreement is a must I think to avoid further problems. No one knows what’s tommorow’s gonna bring.

by: The Financial Blogger | January 20th, 2010 (10:27 am)

@ Mama Zen,
I actually received this book at Christmas! I can’t wait to read it!

Be prepared! Some chapters are kind of ”painful” to read, because you feel a bit like you’ve been betrayed by someone unattainable. Frustrating!

But (I don’t want to give you all contents!), in some ways, I feel more ”globally self-conscious”. I feel I m gaining a lot by reading this book 🙂 as a consumer, as a citizen and as a human being.