Family Loan

A family loan (often called family mortgage) can be a very good solution to an issue of funding. One can often lend under very attractive conditions. By taking out a part of the total sum as a family loan, a lower amount of funding will have to be loaned from the lender. The extra advantage of this is that it decreases the interest on the funding the bank provided. This gives you a "double" advantage. The net monthly costs will therefore also be much lower. 

A family loan is the same as a regular mortgage, except for the fact that (a part of) the money is lent from a third party, and not from a bank. The collateral of the loan is the house. Jointly you will decide the conditions of the loan, such as the amount to be lent, the interest rate, the term of the loan and the way of repayment. 

If you choose for the highest possible interest, you can profit maximally from mortgage interest tax relief. This interest will have to be acceptable to the tax authorities, of course. Should the lender then be satisfied with a rate of return which is not too high, he could make a gift. 

Example:

A family loan of € 50,000 is taken out at an interest rate of 5%. The gross interest expense then amounts to € 2.500 a year. With a tax advantage of 36,93%, the net costs will be € 1.576,75. 

The lender receives a net sum of interest of € 2.500. Should the lender accept a rate of return of 2%, or € 1.000 (considerably higher than on a savings account) an extra return of € 1.500 is made on a yearly basis. The lender can, without obligation, return this sum to the loaner, without a gift tax applying. Read more about this under 'Gift'. 

For the loaner, this results in a net charge of € 76,75 a year.

One should realize, however, that in order to apply for mortgage interest tax deduction, the construction of the loan must adhere to certain fiscal rules. Read more about this under 'Your mortgage and interest deduction'.