Can close family relationships be critically damaged by inter-family lending and what protection should both parties take to protect their interests?

To quote Shakespeare on this subject, in Hamlet, Polonius states:

“Neither a borrower nor a lender be; For loan oft loses both itself and friend.”

However, anecdotal evidence seems to indicate that inter-family lending is on the increase in the UK.

This, of course, is not surprising given that since the credit crunch of 2008, credit has been a very rare commodity, especially for those at opposite ends of the demographic spectrum.

Bank of Mum and Dad

For the young, those looking to get onto the property ladder, many traditional avenues of credit have dried up completely or have become more difficult to access, given the current requirement of lenders for deposits of 20-25% before they open their coffers.

These young aspiring homeowner often have to turn to the ‘Bank of Mum and Dad’ as their first port of call.  This may well take the form of a guarantee – in effect, Mum and Dad becoming the lender of last resort – or more frequently either a direct cash loan from their life savings or credit being taken out in the parents name and immediately passing over this to the offspring.

University education, with its attendant tuition, housing and lifestyle costs, or even that gap year adventure, also ratchet up the likelihood of inter-family loans being needed.

The Retirees

At the opposing ends of this spectrum, the retirees are equally finding it difficult to access the credit lines they require.

Many of this group are rueing the fact that over the past decade or so, final salary pension schemes and the attendant annuity rates have diminished and that they have not provided themselves with sufficient retirement income from this source and the increased cost of living has greatly reduced their life savings, if indeed they had any. This may require offspring to subsidise their parents.

A leading insurer reports recently that those aged between 65 and 74 can be indebted to their families by as much as £7,000.

This same report says that as many as 30% of people would be prepared to enter into credit arrangement in their own name for the direct benefit of other family members.

Inter-family lending can raise many questions, both morally and monetarily.

• Will this loan cause a family rift?  - Sibling rivalry can raise its ugly head here.  Why them and not me? Are they reducing my future inheritance?
• What is the money for?
• Can the recipient repay you, and if so when?
• How much will the loan cost you the lender and can you actually really afford it? Can you live comfortably without the money for the loans term?
• What rate of interest do you charge?

Given just some of these scenarios it is imperative that families considering this course of action take professional financial advice.  This advice needs to be aimed at both parties, the Lender and the Borrower. After all a contract is being entered into, albeit in many cases only a verbal one, but a contract it is.

Have all the options been explored? If the recipient habitually approaches family members for loans, perhaps because the rates are really attractive, maybe they have other more efficient options out there in the real world that can be explained to them.

Have the terms been equitably drawn up and mutually agreed to?

Has the lender sufficient liquid funds available to cover a possible default or interest payment hiatus?

This last point is of great relevance, as default can take many forms.

• The Borrower’s financial position deteriorates further through (say) marriage, new offspring, divorce, unemployment, sickness or even death.
• The Lender suffers similar problems as above, but must adequately cover a possible deterioration of their own credit rating, reduced pension or unexpected costs incurred through business or house maintenance.

Here the professional advisor can offer adequate analysis and cover for all eventualities – to both parties - and thus ensure that the close family relationship is not critically damaged.

It is important to take professional advice before making any decision relating to your personal finances.

NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. THE VALUE OF INVESTMENTS IS NOT GUARANTEED AND WILL FLUCTUATE. YOU MAY GET BACK LESS THAN YOU INVEST. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.