When grown kids ask for money
Is it possible to lend money to your adult kids without keeping them forever in your debt? Yes, providing you’re careful.
My friend's son is in the market for his first home, but he doesn't plan to get a mortgage from a bank. Instead, he hopes to have his recently retired parents lend him the money.
Here's his thinking: Although he's already been preapproved for a five-year fixed mortgage at around four per cent, he hopes to get a much better deal from his parents — along with a sizeable break on closing costs.
At the same time, he's almost convinced his folks that they'll see a better rate of return than they do now from the stack of shorter-term GICs they're using to fund some of their retirement expenses.
Good deal? Well, for him, sure — and maybe for his parents as well, providing they don't spread themselves too thin.
An intra-family mortgage can certainly help first-time homebuyers, particularly if they have other competing expenses such as car payments and student loans.
But lending money to your adult kids can also be a risky proposition if you're not careful. Even a small loan can disrupt or sometimes destroy family relationships.
Many advisors discourage intra-family lending, largely because of the emotional issues created when adult children don't stick to the plan, are late with their payments, default altogether or simply sow discord among other family members who aren't directly involved.
How do you avoid family problems when help is given to one child and not others? Avoid surprises. Before making any final decisions, be upfront with your other kids so they don't feel they're somehow being slighted.
Although your first inclination will be to help out, look at the downside as well. Is your son or daughter's income secure? What happens if they can't — or won't — repay the loan? What if they split with their partner? What if you die?
While it may not have been any of your business until now, make sure you understand the underpinnings of your children's relationships and the impact they might have on any help you're offering. Common-law partners, for instance, don't have the same financial rights as legally married spouses should they break up.
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