Family loan
A family loan (also often called a family mortgage) can sometimes be a very good solution to a financing problem. Through a family loan, you can borrow in a very attractive way. By borrowing a portion through family, less financing is needed from the lender, with the added benefit that the interest rate for the bank financing will be lower. This creates a “double” advantage. And therefore, the net monthly payments will also be much lower.
A family loan is the same as a regular mortgage, except that you borrow (part of) the money from a third party instead of a bank, with the property serving as collateral for the loan. You agree on the loan terms yourselves, such as the amount to be borrowed, the interest rate, the term, and the repayment method.
When you opt for the highest possible interest rate, you can make the most of mortgage interest relief. Naturally, that interest rate must be acceptable to the tax authorities. If the lender is then content with a net return on the loan that isn't too high, it's an option for the lender to make a gift.
Example:
A family loan of €50,000 is granted at an interest rate of 5%. The gross interest charge is therefore €2,500 per year. With a tax relief of 36.93%, the net charge is €1,576.75.
The lender receives €2,500 in net interest. If the lender is satisfied with a return of 2%, or €1,000 (well above the rate on a savings account), an additional return of €1,500 per year is generated. The lender may, if they wish, return this to the borrower as a gift, without any gift tax being due. Read more about this under ‘Gifts’.
This results in a net charge of €76.75 per year for the borrower on their loan.
You do, however, need to be aware that in order to qualify for mortgage interest relief, the structure of the loan must comply with all tax regulations. Read more about this under “Your mortgage and interest relief”.
