Loans to Family Members - how to make sure you will be repaid?

The matters you need to consider are -

How do you wish to secure the loan? There are several methods, but they basically fall into 3 categories -

• An unsecured loan whereby the money is paid pursuant to a verbal or written loan agreement, but you simply rely on the borrowers' assurances of repayment

• An unsecured loan whereby the money is paid pursuant to a verbal or written loan agreement, but a caveat is registered on the title of the land.

• A loan, the repayment of which is secured by a mortgage on the title of the land.

We will explain each -

UNSECURED LOAN

This is not recommended since it does not provide the parents with sufficient security. In this case the parents would only have a personal promise for repayment without the back up of land for repayment.

UNSECURED LOAN WITH REGISTRATION OF A CAVEAT

This method is a little more secure, but as there is an existing loan to a bank, the parents cannot be guaranteed repayment of the loan. The reason for this is that the bank will have first recourse to the land and if the land is not of sufficient value, then the parents loan will not be repaid. Despite the relatively small amount owing, the bank is able to advance further money on the basis of its existing mortgage and the parents will not know about it. In other words, although the loan may be relatively low at the moment, it can again increase and affect the security.

The caveat however will mean the land cannot be sold without notification to the parents.

MORTGAGE ON THE TITLE

Banks use this method because it gives the best possible security as long as land values hold. However, as the bank in this case has a mortgage over the land, the parents would have to become a 2nd mortgagee and their interests would come second after the bank.

In order to register a 2nd mortgage the parents would have to have the bank's consent and this will involve fees and not the best protection.

A mortgage will mean the payment of Land Titles Office larger legal costs, registration fees and possibly Loan Duty.

In our opinion the better protection for the parents would be the repayment of the bank loan by Peter and Lucinda and the parents then taking the 1st mortgage over the land. It means that until the loan by the parents has been repaid or "forgiven" by the parents, the land cannot be sold.

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