Family Loan Agreements – Inter Family Loans

Written by Justine Taylor

With more and more frequency, we are assisting our clients with inter family loans which can be documented with different levels of security. Options to document or secure investment from parents or relatives might include:

1. Registered title. Where parents are assisting in the acquisition of property, it is open to them to pay such money and acquire a percentage or interest in the property, as a legal holder registered on title and reflective of the percentage of funds they would contribute.

The advantage of this is that a percentage of the property would be owned absolutely and remains an asset of the parents, fully protected in that way.

There are, however, disadvantages which include loss of first homeowner incentives, tax matters to consider, potential difficulties with any mortgagee (bank), and a desire for the Borrower to be the owner of the property and have autonomy and independence in that regard.

2. Loan agreement. A loan agreement is an instrument that confirms it is a loan and the amount advanced. The loan agreement can be tailored to preference but should include commercial terms that require the repayment of that money on certain conditions, within a certain time and the consequences of default.

There are different ways in which a loan agreement can provide security for the enforceability of the loan, which include the following:

a. Loan agreement secured by registered mortgage: this is where (like a bank) the loan agreement gives rise to the Lender’s entitlement to register a mortgage which secures the repayment of the loan to the Lender in priority to other unsecured creditors. A mortgagee also has certain rights in the event of a default, including to obtain possession and exercise power of sale, or to appoint a receiver and manager to sell the property.

A mortgage provides a significant degree of security in relation to the funds to be loaned. On the other hand, a mortgage may interfere with a first-tier lender, such as a bank, and their preparedness to loan money to the Borrower. The mortgage can also psychologically be seen as invasive from the Borrower’s perspective.

You can also have an unregistered mortgage which is not reflected on title but capable of registration at a later date.

b. Loan agreement secured by unregistered mortgage or charge over property: this gives rise to a secured interest which can be protected by caveat. A charge may be simply imposed by a clause in the loan agreement that secures the repayment of the loan in priority to other unsecured creditors. An unsecured mortgage or charge usually gives the Lender the right to lodge a caveat, which prevents the property from being sold or dealt with in any way until the caveat is removed such as on repayment of your debt from the

proceeds of sale. They afford a level of security in relation to loan, but not as much as a registered mortgage.

c. An unsecured loan: this is a loan recorded by way of deed of loan or loan agreement, that does not give rise to any secured interest and does not entitle the Lender to lodge a caveat on title. This means that in the event of any default, the Lender would be an unsecured creditor with the same ranking as all other debts that Borrower may owe at that particular time. If there are more debts than assets, the Lender would not receive payment in full, and would usually only receive a percentage (if at all).

Estate planning: We can incorporate family loans into wills and estate planning documents, such as assignment of the loan to a testamentary trust after death to continue the security.

Contact our team to discuss tailoring documents that are right for your family.