A Family Mortgage Can Often Be Interesting For All Parties
When people want to take out a mortgage, initially they rarely think about going to their parents or other family members. Yet a family mortgage is often an interesting option which can be beneficial to all parties.
The biggest benefit of a family mortgage is that the money stays in the family. The benefit for those who lend the money to you is that their revenue will be higher than if they placed the money in a savings account. This is because although the mortgage interest will be very low, the interest received on savings would be much lower! The benefit for you is that you can borrow more. And if you take out a mortgage from the bank in addition to the family mortgage, you will probably pay a lower mortgage interest rate. The loan compared to the value is lower for the bank and therefore the bank has less risk.
Mortgage interest deduction
A family mortgage can be as large as the total purchase price of your house, but it is also possible to take out only part of the loan as a family mortgage. As with a regular mortgage, you may deduct the interest from a family mortgage on your tax return if you meet these three requirements:
-You have to pay interest in line with the market.
-You must repay the loan in 30 years (annuity or linear).
-The terms and conditions of the mortgage must be set down on paper (by a notary).
There are also administrative requirements. Just like the bank, your parents or other family members must make an annual statement of the repayments received and the interest paid. They must also pass this on to the Tax Authorities. Furthermore, you must actually pay the interest and repay the mortgage. Repaying by means of remission is therefore not allowed.
Peter and Elisa are going to buy their first house. That house costs € 220,000. They take out a mortgage of € 170,000 from the bank and borrow the remaining € 50,000 from Peter’s parents. Because the loan from the bank is much lower than the value of the house, they do not pay a “risk premium” and the mortgage interest rate is therefore lower than if they had borrowed a 100% mortgage from the bank.
The interest they agree on for the family mortgage is 2.5%. So in the first year they pay 2.5% x € 50,000 = € 1,250 interest to Peter’s parents. The interest on € 50,000 in a savings account would have been no more than € 125.
Peter’s parents keep € 750 of that amount themselves and donate € 500 back to Frank and Elisa. As this amount falls within the gift exemption, they do not have to pay tax on it. In this way all parties benefit financially.
It is important to get good advice.
It is also wise to get good advice on family mortgages. As Accredited Financial Advisors, we will map out what you do and don’t want and we will discuss the various scenarios together with you. You will also receive advice on the family mortgage itself and (financial) risks such as death, disability and unemployment. Would you like to learn more about your options? Contact Us