Borrowing from parents - what interest rate?

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sydbogle
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Borrowing from parents - what interest rate?

Post by sydbogle » Tue Nov 14, 2017 12:28 am

Fellow Bogleheads,

I am soon to borrow a substantial sum of money from my parents, which will be used to purchase a new home. The loan will be repaid within 5 years and we will have a formal agreement drawn up to avoid any misunderstandings down the track.

The money will come from the portion of their retirement savings currently allocated to bonds. My question is: how should we calculate a fair fixed interest rate for them to charge us? My parents are very easygoing and are happy to leave this up to me, but I don't want to shortchange them, and likewise I don't want to pay too much.

I thought it might be reasonable to look for the highest term deposit rate available, and the lowest mortgage rate available, and split the difference.

Do you have any other ideas?

Thanks in advance.

EHEngineer
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Re: Borrowing from parents - what interest rate?

Post by EHEngineer » Tue Nov 14, 2017 12:37 am

Get a quote from a bank for an unsecured personal loan. 8-10% last I checked.

This parental loan is not comparable to an FDIC insured account. And since they cannot forclose on your house as a 1st or even a 2nd lein, this is not comparable to a mortgage. You're underestimating the risk they are taking.
Or, you can ... decline to let me, a stranger on the Internet, egg you on to an exercise in time-wasting, and you could say "I'm probably OK and I don't care about it that much." -Nisiprius

supalong52
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Re: Borrowing from parents - what interest rate?

Post by supalong52 » Tue Nov 14, 2017 1:53 am

It really should be up to your parents. Comparing it to an unsecured loan is ridiculous. They probably want to make it more affordable for you than a mortgage so your initial thought is probably fair, but try to leave it up to them.

msk
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Re: Borrowing from parents - what interest rate?

Post by msk » Tue Nov 14, 2017 2:32 am

From a parent's point of view: Just look up 5 year corporate bonds and pay that rate. As a parent I would be at greater pain if my son fell into hard times so bad that he can no longer meet his payments to me than some loss on the loan I made him. You could also look up 5-year government bonds to shave on the interest rate slightly.

Back when interest rates were very high (1980s?) I made loans to siblings. They paid the interest rate that I could get at the time on bank CDs. We ended up happy with the arrangement. They got loans at below bank loan rates, I did not lose on interest rates on my cash.

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randomizer
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Re: Borrowing from parents - what interest rate?

Post by randomizer » Tue Nov 14, 2017 2:34 am

2.5% is the correct answer.

2comma
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Re: Borrowing from parents - what interest rate?

Post by 2comma » Tue Nov 14, 2017 3:17 am

We were living in a rental when our elderly landlord passed away. His estate lawyer called and said the beneficiaries wanted to sell us the house for its tax appraisal value, a huge discount. At first I declined, we wern't even thinking about buying a house but the lawyer impressed upon me how good of an opportunity this was. My FIL had a lot of money in bonds and cash and said he would make the loan to us as it would be a great for him if he could get "the going rate for mortgages". It was a good deal for us because we didn't have to qualify, pay PMI or pay anything down. We went to a real estate lawyer, drew up an agreement and the deal was done. My FIL took me aside one day and let me know that if anything happened to me he would gift the loan to his daughter but if we got divorced or she was to die I would be on the hook; at that moment it became a real loan to me.

There are enough advantages in this, for you that I wouldn't feel right settling for too much below the going rate. Of course, when it comes to money lending to family members it all depends on the trust relationships and personalities involved and if you have any siblings I'd make sure they don't have any issues about future inheritances/favoritism and such...
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Re: Borrowing from parents - what interest rate?

Post by Cruise » Tue Nov 14, 2017 3:34 am

Call three local financial institutions and find out their rate for home loans. Use the average as your interest rate.

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Re: Borrowing from parents - what interest rate?

Post by Caduceus » Tue Nov 14, 2017 3:35 am

sydbogle wrote:
Tue Nov 14, 2017 12:28 am
Fellow Bogleheads,

I am soon to borrow a substantial sum of money from my parents, which will be used to purchase a new home. The loan will be repaid within 5 years and we will have a formal agreement drawn up to avoid any misunderstandings down the track.

The money will come from the portion of their retirement savings currently allocated to bonds. My question is: how should we calculate a fair fixed interest rate for them to charge us? My parents are very easygoing and are happy to leave this up to me, but I don't want to shortchange them, and likewise I don't want to pay too much.

I thought it might be reasonable to look for the highest term deposit rate available, and the lowest mortgage rate available, and split the difference.

Do you have any other ideas?

Thanks in advance.
I think that would significantly understate the interest rate they should charge. What interest rate would you be charged if you had the exact same arrangement with a bank or private lender?

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djpeteski
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Re: Borrowing from parents - what interest rate?

Post by djpeteski » Tue Nov 14, 2017 7:15 am

Don't do it.

student
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Re: Borrowing from parents - what interest rate?

Post by student » Tue Nov 14, 2017 7:40 am

If you can repay the loan within 5 years, then you are in good financial shape. There is no need for the complication to not get a mortgage loan from a bank.

p0nyboy
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Re: Borrowing from parents - what interest rate?

Post by p0nyboy » Tue Nov 14, 2017 8:07 am

I would say it depends how much your parents have. If they have a lot of money then why charge you any interest? Arent you going to inherit everything anyways when they die in the future? How about a %0 loan?

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JPH
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Re: Borrowing from parents - what interest rate?

Post by JPH » Tue Nov 14, 2017 8:15 am

If the money is coming out of their retirement account will they have to pay taxes? Will it put them in a higher bracket? Will you compensate them?
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Re: Borrowing from parents - what interest rate?

Post by cherijoh » Tue Nov 14, 2017 8:16 am

p0nyboy wrote:
Tue Nov 14, 2017 8:07 am
I would say it depends how much your parents have. If they have a lot of money then why charge you any interest? Arent you going to inherit everything anyways when they die in the future? How about a %0 loan?
If the parents don't charge the going rate for interest, then it is viewed as a gift and the gift tax regulations come into play. There is an annual limit beyond which the givers have to file paperwork to keep track of the amount which will eventually be subtracted from their lifetime gift tax allowance. Presumable the loan amount is large enough that they can't just gift the money and stay below the annual limit.

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Re: Borrowing from parents - what interest rate?

Post by SimonJester » Tue Nov 14, 2017 8:49 am

Will your parents be able to report the loan to the credit agencies? If not you are loosing out on that benefit. Will they be able to generate you a 1098 each your so you can deduct the "mortgage" interest?
"They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety." - Benjamin Franklin

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DaftInvestor
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Re: Borrowing from parents - what interest rate?

Post by DaftInvestor » Tue Nov 14, 2017 9:19 am

2.5%: Lower than current mortgage rates for you (since you won't have the benefit of a deduction I'm not sure why you would do it otherwise) and in-line with the short-term bond payments your parents will be missing while you use their money.
Financially - it might actually make more sense to take out a mortgage but perhaps there is some reason you are unable to do so (bad credit, etc.).

Houe
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Re: Borrowing from parents - what interest rate?

Post by Houe » Tue Nov 14, 2017 9:22 am

djpeteski wrote:
Tue Nov 14, 2017 7:15 am
Don't do it.
This. Many family relations go south because of things like this. Not worth the risk.

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3CT_Paddler
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Re: Borrowing from parents - what interest rate?

Post by 3CT_Paddler » Tue Nov 14, 2017 9:52 am

It's called an Intra-Family Mortgage. There are several threads on it - see https://www.google.com/search?sitesearc ... y+mortgage.

A good link on the minimum interest rate for intra-family loans that meet federal requirements and tax consequences for both parties is here - https://www.nationalfamilymortgage.com/afr-rates/

In a nutshell, there is a minimum interest rate that you can apply that still allows you to take advantage of interest deductibility on taxes, and avoid additional taxes from the person underwriting the mortgage. Right now for mid-term loans (3-9 years), the rate is close to 2%.

As far as what is fair, that is up to you and your family member.

I would push back on some of the negative responses to the idea. Smart, financially responsible people like EmergDoc and others have pointed out that in the right circumstance it is a win for both parties right now. With interest rates for fixed income intermediate term securities at such low rates, the lender can often get a rate higher than what they would get on the marketplace and the borrower gets a rate better than the open market. Provided both parties are responsible, it can be a win-win.

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Re: Borrowing from parents - what interest rate?

Post by bloom2708 » Tue Nov 14, 2017 9:54 am

djpeteski wrote:
Tue Nov 14, 2017 7:15 am
Don't do it.
+1

Family dinners and visits will have a new "vibe". Banker sharing meals with the lender.

If you need a large loan from your parents, you cannot afford the house at this point.
Last edited by bloom2708 on Tue Nov 14, 2017 12:03 pm, edited 1 time in total.
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fourwheelcycle
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Re: Borrowing from parents - what interest rate?

Post by fourwheelcycle » Tue Nov 14, 2017 11:03 am

3CT_Paddler wrote:
Tue Nov 14, 2017 9:52 am
In a nutshell, there is a minimum interest rate that you can apply that still allows you to take advantage of interest deductibility on taxes, and avoid additional taxes from the person underwriting the mortgage. Right now for mid-term loans (3-9 years), the rate is close to 2%.

As far as what is fair, that is up to you and your family member.
This is the correct answer. From the web: " Mid-term IRS AFR Rates - For Loans More Than 3 & Up To 9 Years: Nov. 2017 2.00% "

If your parents are doing this to help you out I expect they will want to offer you the IRS minimum rate that you can report if you itemize your deductions and that will not result in a penalty for them if the IRS ever looks into it, so 2.00% is the current correct answer.

Or, of course, any higher interest rate that is acceptable to you and to your parents.

thangngo
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Re: Borrowing from parents - what interest rate?

Post by thangngo » Tue Nov 14, 2017 11:07 am

djpeteski wrote:
Tue Nov 14, 2017 7:15 am
Don't do it.
I support this.

OP: It's a terrible idea. Why would you do this to your parents? Don't put their retirement savings at risk.

In addition, you will short-charge them if you pay them less than the after-tax return of the bond that your parents would have had if they did not give you a loan. By rule, they will have to include any interest income on their 1040. Also, are you certain that you will be able to over IRS hurdles to itemize mortgage interest?

chevca
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Re: Borrowing from parents - what interest rate?

Post by chevca » Tue Nov 14, 2017 11:43 am

Anyone notice the OP's location lists Australia? Much of the tax advice given may not be applicable to the OP. Of course, I have no idea what Australia's tax laws are, so maybe it is.

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gasdoc
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Re: Borrowing from parents - what interest rate?

Post by gasdoc » Tue Nov 14, 2017 11:58 am

Do you really want your parents to look at you funny every time you go on vacation or buy an expensive item for your home, wondering why you are spending money when you still owe them money? I wouldn't do the deal.

gasdoc

Flashes1
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Re: Borrowing from parents - what interest rate?

Post by Flashes1 » Tue Nov 14, 2017 12:26 pm

A lot of personal bias leaking into the recommendations. The OP asked what interest rate to pay; not if the board thinks it okay to do it.

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Re: Borrowing from parents - what interest rate?

Post by bloom2708 » Tue Nov 14, 2017 12:30 pm

Flashes1 wrote:
Tue Nov 14, 2017 12:26 pm
A lot of personal bias leaking into the recommendations. The OP asked what interest rate to pay; not if the board thinks it okay to do it.
Yep. I like that part. I don't know what I don't know. The OP might not know what they don't know either. Think outside of the box.

or

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bligh
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Re: Borrowing from parents - what interest rate?

Post by bligh » Tue Nov 14, 2017 12:56 pm

It all depends on just how well off your parents are and your family's culture.

I know of multiple people who have had their homes bought for them in cash by their parents with no repayment needed. I also know a couple that got an interest free loan from their parents to buy their home, to be paid back in fixed installments over however long was needed.

Of course in all of the above cases the parents were very wealthy. If my parents were just comfortable in retirement I would not take a loan like that from them unless it was in THEIR advantage (ie. higher interest rate for the risk being taken). If they were very wealthy, I'd take a loan for whatever rate they felt was fair, or even an interest free loan if they were okay with it. The current rate on a 15 year mortgage might be a good place to start.

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Re: Borrowing from parents - what interest rate?

Post by Kevin M » Tue Nov 14, 2017 1:30 pm

sydbogle wrote:
Tue Nov 14, 2017 12:28 am
I thought it might be reasonable to look for the highest term deposit rate available, and the lowest mortgage rate available, and split the difference.
This seems reasonable.

Until recently, I thought I would be making an intra-family mortgage loan to my daughter and her husband to buy a fractional interest in a house, where my fractional interest would be the replacement property for a 1031 exchange. I was thinking of a 5-year interest-only loan at 3%, and would even defer all interest payments until the loan was paid off, if that was acceptable to the IRS. I was thinking 3% since that's a bit more than I could get in a good 5-year CD (about 2.5%), and definitely less than the best rate they could get on a conventional mortgage (which I was guessing would be at least 4%).

This would have been paid off with an inheritance my daughter should be getting in much less than five years.

Kevin
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Re: Borrowing from parents - what interest rate?

Post by pondering » Tue Nov 14, 2017 1:34 pm

How much interest will be due annually?
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DrGoogle2017
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Re: Borrowing from parents - what interest rate?

Post by DrGoogle2017 » Tue Nov 14, 2017 1:35 pm

I would pay them 5 year CD rate, around 2.25%-2.5%.

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Re: Borrowing from parents - what interest rate?

Post by smackboy1 » Tue Nov 14, 2017 1:37 pm

sydbogle wrote:
Tue Nov 14, 2017 12:28 am
I am soon to borrow a substantial sum of money from my parents, which will be used to purchase a new home. The loan will be repaid within 5 years and we will have a formal agreement drawn up to avoid any misunderstandings down the track.

The money will come from the portion of their retirement savings currently allocated to bonds. My question is: how should we calculate a fair fixed interest rate for them to charge us? My parents are very easygoing and are happy to leave this up to me, but I don't want to shortchange them, and likewise I don't want to pay too much.

I thought it might be reasonable to look for the highest term deposit rate available, and the lowest mortgage rate available, and split the difference.
This is fairly common and straightforward. I would recommend consulting a lawyer to make sure things are done correctly and to understand the legal and tax consequences. Australian laws and US laws are totally different. Here are some things to keep in mind:

- Make sure the desires of all parties are understood. Are your parents' intent to make a large gift to you? Or do your parents need to have a real ROI on the loan because it's part of their FI allocation for retirement? That answer will help determine how much you will have to pay back to your parents.

- Is there a commercial mortgage lender involved? Make sure to check if this other debt will cause an issue.

- When there is home purchase loan, the borrower can deduct interest payments if certain conditions are met. In the US there needs to be a recorded mortgage and note. The lender has to report the interest received as ordinary income. If the debt is not secured by a lien, then it cannot be deducted by the borrower. There may be pros and cons to either option.

- In the US the lowest legal interest rate for a loan is the Applicable Federal Rate. Anything lower than the AFR could result in imputed interest. There may be something similar for your country.

- In the US annual fed gift tax exclusion in 2017 is $14,000 per donor per recipient. Lifetime estate tax exemption as of 2017 is $5.49 MM per individual. So that's a lot of gifting that could be done without paying any fed taxes. So for a US taxpayer in this situation, it's usually not advantageous to have a high interest rate which would result in more taxes. Gifting could work better.

- Forgiveness of debt may be taxable as income to the borrower.

- Plan for unlikely scenarios. The note will be an asset to your parents and a liability to you (and your spouse?). What if you or your parents get divorced? What if somebody unexpectedly dies and an unfriendly party inherits the note? What if creditors seize the note as an asset?
Disclaimer: nothing written here should be taken as legal advice, but I did stay at a Holiday Inn Express last night.

p0nyboy
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Re: Borrowing from parents - what interest rate?

Post by p0nyboy » Tue Nov 14, 2017 1:54 pm

cherijoh wrote:
Tue Nov 14, 2017 8:16 am
p0nyboy wrote:
Tue Nov 14, 2017 8:07 am
I would say it depends how much your parents have. If they have a lot of money then why charge you any interest? Arent you going to inherit everything anyways when they die in the future? How about a %0 loan?
If the parents don't charge the going rate for interest, then it is viewed as a gift and the gift tax regulations come into play. There is an annual limit beyond which the givers have to file paperwork to keep track of the amount which will eventually be subtracted from their lifetime gift tax allowance. Presumable the loan amount is large enough that they can't just gift the money and stay below the annual limit.
Ah ok. The situation was different than what my wife and I recently did. We purchased my inlaws house...we gave them 50% as a down payment...then they are allowing us to pay them the rest over a 15 year period at 0% interest rate. Saves us around $40,000 in interest. Cant complain.

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Re: Borrowing from parents - what interest rate?

Post by pondering » Tue Nov 14, 2017 2:07 pm

A key number here is 28,000. If the amount of interest is less than that, and no other gifts are planned for the year, the interest rate won’t matter, since the balance of interest can be considered a gift
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NonnyGoGo
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Re: Borrowing from parents - what interest rate?

Post by NonnyGoGo » Tue Nov 14, 2017 2:31 pm

We have had several intra-family loans among various members of my family. The OP's proposal is exactly what we do: split the rates down the middle and everybody's happy. I always shake my head when the "don't do it" posts show up. You know your family but your family's probably better than you think.

123
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Re: Borrowing from parents - what interest rate?

Post by 123 » Tue Nov 14, 2017 2:32 pm

Don't do it. Be a grown-up and get a regular loan from a bank. If for some reason you can't get a loan from a bank or other commercial lender it probably means that you're not financially ready to buy a house. If you have a loan from your parents they will not respect you as much as if you had gotten a loan from an outsider. In their minds it will be "their" house so you may well have to tolerate surprise visits from them, at inopportune times, that you wouldn't have to if you had bought the house on your own. There will be family dynamics involved that you can't anticipate now.

Be a grown-up and get your own loan without their assistance.
The closest helping hand is at the end of your own arm.

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Re: Borrowing from parents - what interest rate?

Post by mouses » Tue Nov 14, 2017 2:37 pm

JPH wrote:
Tue Nov 14, 2017 8:15 am
If the money is coming out of their retirement account will they have to pay taxes? Will it put them in a higher bracket? Will you compensate them?
+1

I really wouldn't do this. If you're in good enough shape to pay the loan off in five years, you're in good enough shape to get a regular loan. Don't mess with their savings unless they're fabulously wealthy and this is a pittance to them.

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Re: Borrowing from parents - what interest rate?

Post by travellight » Tue Nov 14, 2017 3:00 pm

I did this many years ago, only because my mom offered and wanted me to and I was sure I could pay it back within 2 years. I got my own mortgage but borrowed some money for the down payment. I paid her back in 2 years with about 8% interest, lump sum.

I wouldn't borrow from friends of family if there was any risk of not making good on it promptly.

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Re: Borrowing from parents - what interest rate?

Post by Voland » Tue Nov 14, 2017 3:37 pm

To asnwer your direct question...

If you do not want to shortchange your parents then the only answer is the loan rate should be the same as what they are currently getting on their bonds including any adjustments based on the tax laws of your country. If you set the rate lower than that then your parents would be giving up some of expected returns in order to help you. They would essentially be subsidizing you at their own expense.



To add a personal note...

There is nothing wrong if parents want to help their kid get a better start at life. And if they are willing to forgo some of the interest earned on their bonds to help the kid with down payment or whatnot, there is nothing wrong with that. Having said that, if your parents have to dig into their retirement savings to help you out, then it doesn't sound like they can afford it. I also question why can't you get a conventional loan? To me, this means that you can't get a loan otherwise, which means that you are not ready to buy a house. So, your parents can't afford it, and you're not ready to buy it either. Based on the limited information that you provided, to me this loan sounds like a bad idea.

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Re: Borrowing from parents - what interest rate?

Post by Sandtrap » Tue Nov 14, 2017 3:44 pm

123 wrote:
Tue Nov 14, 2017 2:32 pm
Don't do it. Be a grown-up and get a regular loan from a bank. If for some reason you can't get a loan from a bank or other commercial lender it probably means that you're not financially ready to buy a house. If you have a loan from your parents they will not respect you as much as if you had gotten a loan from an outsider. In their minds it will be "their" house so you may well have to tolerate surprise visits from them, at inopportune times, that you wouldn't have to if you had bought the house on your own. There will be family dynamics involved that you can't anticipate now.

Be a grown-up and get your own loan without their assistance.
My son and his wife bought a home. Qualified for the mortgage. Made the down payment. Then made on time monthly payments as well as property insurance, and all that. After a year of seeing that he could do it on his own, and had been completely financially independent, I paid off his mortgage as a surprise. However, there was an agreement that the mortgage payment that he would have made would be put into Vanguard for himself. He owned up to it. Personally, I do not want my children owning me money and vs vs. But that is just "old school' me and my cultural context and emphasis on independence, and desire to keep relationships simple and intact. I would rather gift than loan, or none at all. No strings. Dignity learned. There are so many options and situations that turn out well and wonderful and some not so.
YMMV.
Last edited by Sandtrap on Tue Nov 14, 2017 3:48 pm, edited 3 times in total.

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steelerfan
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Re: Borrowing from parents - what interest rate?

Post by steelerfan » Tue Nov 14, 2017 3:45 pm

I am going to join the chorus that is singing, "Don't do this!"
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Nowizard
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Re: Borrowing from parents - what interest rate?

Post by Nowizard » Tue Nov 14, 2017 5:48 pm

When we borrowed, years ago, under similar circumstances, we did the following:
1. Inquired about the financial stability of my parents to insure, as much as possible, that they were not making a decision solely on the family relationship but that it would benefit each of us.
2. Signed a note that reflected the particulars of the loan
3. Determined their rate of return on the investments from which the loan would be withdrawn quarterly and paid them that amount plus 1 percent. This resulted in a lower than market interest rate and a higher rate of return for my parents.
4. Appropriate IRS decisions made for their interest and our deductions of interest.

This was not set up as a mortgage loan.

Tim

sydbogle
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Re: Borrowing from parents - what interest rate?

Post by sydbogle » Tue Nov 14, 2017 7:27 pm

Thanks all for your responses.

To clarify: we are also acquiring a standard loan from a bank, but we are unable to borrow as much as we would like (and can easily afford) due to my business structure - i.e. our earnings are not well reflected on our personal annual tax returns, and banks are quite rigid in how they assess borrowing capacity.

Also, as we are in Australia, interest on a loan used to purchase a principal place of residence is not deductible. As such, there is no disadvantage to us in borrowing from family.

Once again, I appreciate your comments.

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Re: Borrowing from parents - what interest rate?

Post by TravelforFun » Tue Nov 14, 2017 7:47 pm

NonnyGoGo wrote:
Tue Nov 14, 2017 2:31 pm
We have had several intra-family loans among various members of my family. The OP's proposal is exactly what we do: split the rates down the middle and everybody's happy. I always shake my head when the "don't do it" posts show up. You know your family but your family's probably better than you think.
I've done this for my kids and other members of my family have done the same for theirs. Never had a problem but of course, we're all different.

TravelforFun

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Re: Borrowing from parents - what interest rate?

Post by 260chrisb » Tue Nov 14, 2017 8:00 pm

I know you asked about what rate to charge but I have to ask; why would you do this? If it's a substantial amount of money and you're able to repay it in five years and interest rates are at all time lows for 15 year fixed mortgages and you get to deduct the interest then why? Not worth the family risk or their retirement money risk. Go get a 15 year fixed rate at about 3.5 and pay it off in 5 years. Seems to me people are always getting themselves into odd financial messes and to me this would be one.

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giacomo_bogle
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Re: Borrowing from parents - what interest rate?

Post by giacomo_bogle » Tue Nov 14, 2017 8:11 pm

msk wrote:
Tue Nov 14, 2017 2:32 am
From a parent's point of view: Just look up 5 year corporate bonds and pay that rate. As a parent I would be at greater pain if my son fell into hard times so bad that he can no longer meet his payments to me than some loss on the loan I made him. You could also look up 5-year government bonds to shave on the interest rate slightly.

Back when interest rates were very high (1980s?) I made loans to siblings. They paid the interest rate that I could get at the time on bank CDs. We ended up happy with the arrangement. They got loans at below bank loan rates, I did not lose on interest rates on my cash.
Excellent point. As a parent I would be really pained if my kid fell into hard times so bad that he can no longer meet his payments to me than some loss on the loan I made him. Can your parents withstand this loss from their financial perspective?

TheAncientOne
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Re: Borrowing from parents - what interest rate?

Post by TheAncientOne » Tue Nov 14, 2017 8:24 pm

We are in the position that your parents are. We used the Applicable Federal Rate as posted each month by the IRS. You would be in the 3-9 year loan category. Here are the numbers for October 2017. Your parents will have to report the interest income on their income taxes while you do not get to itemize it on yours since it will not be secured by a mortgage. Under this circumstance, no reason for either you or your parents to pay more. If you pay a lower rate, the IRS can say that there's a gift element involved, if that's an issue for their estate planning.

https://www.irs.gov/pub/irs-drop/rr-17-20.pdf

maineminder
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Re: Borrowing from parents - what interest rate?

Post by maineminder » Tue Nov 14, 2017 8:41 pm

Houe wrote:
Tue Nov 14, 2017 9:22 am
djpeteski wrote:
Tue Nov 14, 2017 7:15 am
Don't do it.
This. Many family relations go south because of things like this. Not worth the risk.
+1 as I did this.

My terms were looser. I was told pay it off when you can. We didn't even agree on an interest rate. (shame on me).

A few years later the family finances got tough with 2 kids having arrived and a potential layoff in the mix. I needed to get that emergency fund in order. After delaying a few payments I was getting snide remarks about the missed payments.

I paid off that loan as fast as I could and I still hear about it decades later.

At the time time they were more than happy to help us out and no they didn't need the money. There are unwritten rules.

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sunny_socal
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Re: Borrowing from parents - what interest rate?

Post by sunny_socal » Tue Nov 14, 2017 8:43 pm

I'd take out a loan against my car instead, rates are pretty good these days. Similar payback period as what you're planning.

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Re: Borrowing from parents - what interest rate?

Post by Dottie57 » Tue Nov 14, 2017 10:14 pm

NonnyGoGo wrote:
Tue Nov 14, 2017 2:31 pm
We have had several intra-family loans among various members of my family. The OP's proposal is exactly what we do: split the rates down the middle and everybody's happy. I always shake my head when the "don't do it" posts show up. You know your family but your family's probably better than you think.

You are lucky with responsible family members. It ain't necessarily so for others.

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Re: Borrowing from parents - what interest rate?

Post by letsgobobby » Tue Nov 14, 2017 10:30 pm

sydbogle wrote:
Tue Nov 14, 2017 12:28 am
Fellow Bogleheads,

I am soon to borrow a substantial sum of money from my parents, which will be used to purchase a new home. The loan will be repaid within 5 years and we will have a formal agreement drawn up to avoid any misunderstandings down the track.

The money will come from the portion of their retirement savings currently allocated to bonds. My question is: how should we calculate a fair fixed interest rate for them to charge us? My parents are very easygoing and are happy to leave this up to me, but I don't want to shortchange them, and likewise I don't want to pay too much.

I thought it might be reasonable to look for the highest term deposit rate available, and the lowest mortgage rate available, and split the difference.

Do you have any other ideas?

Thanks in advance.
Your parents can and should generate a 1098, as both of you will benefit. Yes they can file a lien. Yes it is deductible for you.

I did this with my parents. No problem. Kept the money in the family. I got a quick loan and ability to pay cash for property and close quickly which let me offer a slightly lower price on the house, and outcompete several other offers. My parents got a higher rate than comparable risk corporate bonds. It was a win win.

2-2.5% seems right.

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Re: Borrowing from parents - what interest rate?

Post by Theseus » Tue Nov 14, 2017 10:35 pm

I agree with those who said don’t do it. As soon as money is involved the dynamic of the relationship will change. And there are other aspects that come in also.

I loaned money twice to family members to buy their homes with no explicit payment plan in place. One paid off quickly enough as soon as their old house sold. The other took their sweet time paying back while I witnessed them spending money on cars, vacations, restaurants, fancy furniture etc for years. Even though it wasnt a lot of
Money and I didn’t need it I resented the way they were spending money and not thinking of paying it back first. But I never said anything and eventually they did payoff - no interest. But second time they approched me for a loan of a much larger amount for his office (they are doctors) I found a reason to not extend it even though I could have easily done it and I actually had the money in cash that was earning nothing.

Money just creates a dynamic that changes the relationship. This is one reason I refuse to go into business or investment with family or friends. I value relationships a lot more.

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LiveSimple
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Re: Borrowing from parents - what interest rate?

Post by LiveSimple » Tue Nov 14, 2017 11:24 pm

4.50 %

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