Gift or Loan?

Gift or Loan?

Is there a difference between a gift and a loan when it comes to obtaining a mortgage? How do you define just what is a gift or loan – especially when it comes from a family member on a handshake, and the difference might be a little fuzzy around the details if no legal advice has been sought to confirm the arrangement.

Perhaps a personal story might illustrate a scenario that can arise given the lack of clear communication and understanding between two people in the process of applying for a mortgage to purchase a house.

“When Paul and Phillipa were expecting their first child, Paul’s parents offered to lend them a substantial down payment on a house so that the baby would have a yard to play in. Paul and Phillipa were thrilled, especially because Paul’s parents said that they didn’t expect the young couple to start paying back the loan until Phillipa returned to work after her year of maternity leave.

The house was purchased with the down payment provided by Paul’s parents that covered 50% of the purchase price…A year passed. Phillipa went back to work, and two sets of caring grandparents set up a schedule for child tending so that the young couple would not have to pay high child care costs and the baby could be looked after in her own home while her parents were at work.

Six months passed before Paul’s father arranged to go golfing with his son on a Saturday afternoon. While they were enjoying an after-game drink, his father brought up the subject of the house loan, wondering when he and his wife could start counting on it being paid back on a monthly basis. He had prepared an amortization schedule with interest at only 1.5% per year, compounded annually. He had expected Paul to be appreciative of the low rate and the long amortization period (40 years). There was a note at the bottom of the paper saying that in the event of the death of both of Paul’s parents, the balance owing on the loan would come off Paul’s inheritance from the estate in order to be fair to Paul’s two sisters who were also heirs.”

Problems started because the son felt the money was a gift. The father insisted he never implied it was a gift, and that they expected the money back. The result was a family rift where Paul’s parents were no longer welcome in the house, and the situation ended up in a “bitter court battle.”

“The Judge ruled that Paul and Phillipa must pay back the money they borrowed towards their house purchase. He also ruled that their grand-daughter, now three years old, must be allowed to see her parental grandparents on a regulated schedule.”

In describing the difference between a gift and a loan, the book Mortgage Smarts suggests, “getting independent legal advice and having proper contracts drawn up is essential – even when dealing with our nearest and dearest.”

Published with permission from authors Peter Dale and Helen Jones of Mortgage Smarts  – Friesen Press.

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