What is a family mortgage?
It resembles a regular mortgage, but in this case, you are not borrowing from a bank but from a family member. Parents often do this when their child faces difficulty in obtaining a mortgage for a home, with the parents acting as the lenders. However, it is crucial to seek proper advice because to ensure that the loan complies with tax regulations, you must consider the conditions set forth by the Tax Authority.
What are the terms and conditions?
The agreements (conditions) that you establish with the family member can naturally vary. Everyone has the freedom to determine to some extent the terms associated with the loan. However, there are certain conditions imposed by the Tax Authority to ensure that the loan complies with fiscal requirements.
Loan for the primary residence
The loan must be used for purchasing a primary residence, renovating, or maintaining it. Additionally, you are allowed to redeem ground lease (erfpacht) using the loan.
30-year repayment term
The loan must be structured as either an annuity or linear repayment plan, with a maximum duration of 30 years. If the loan was secured before January 1, 2013, this condition does not apply. All these agreements should be documented in a loan agreement.
Market-conform interest rate
The interest you pay on the family mortgage should be in line with the mortgage interest you would pay if you were to obtain a mortgage from a bank. Of course, there are exceptions to this rule. The Tax Authority has provided several examples to illustrate this.
The interest must be paid
The interest must genuinely be paid to your parents. If your parents have stated that you don’t need to pay the interest, then the interest is not deductible in your income tax return.
Not fiscal partners of each other
You may not be fiscal partners with the lender (your family member). If you are fiscal partners, it means that the interest is not tax-deductible.
How to set down the terms?
All agreements regarding the family mortgage must be documented in writing. To ensure compliance with the Tax Authority’s conditions, it is advisable to have the loan agreement formalized by a tax advisor or a notary. They can assist in clearly outlining all the agreements so that both parties (the borrower and the lender) are aware of their respective commitments.
What are the benefits of a family mortgage?
For you, the borrower, it is often easier to obtain a loan from a family member than from a bank. After all, family members know you better and may assess your financial situation with a more lenient perspective than a bank might.
For the lender (the family member), there are also advantages. Most people keep their money in savings accounts, where they can earn returns through received interest. However, the interest on a savings account is often low. By lending the money to a family member, the return can be higher because mortgage interest rates are typically much higher than the interest on a savings account.
We are happy to help!
In short, a family mortgage is a loan between family members. This allows the borrower to get a mortgage more easily than from a bank and allows the lender to make a profit. Of course, such a mortgage also comes with conditions and agreements. Does a family mortgage sound like a good option for you? Feel free to contact us. The Tax Savers will be happy to help you go over all the details and make sure you can finalize your mortgage with your family member in a legally correct way. You can fill in the contact form or call us at 020-217012.
Start saving time with The TaxSavers
Speak directly with one of our tax advisors
We are happy to help! Please, contact us using the details below.