UGANDA, Kampala | Real Muloodi News | Bank mortgages are expensive, particularly throughout Africa. In Uganda, the lending rate currently stands at around 17.5%, depending on the financial institution. On top of that, most banks require you to put down a 30% cash deposit of the property purchase value. Not to mention fees and charges that are pilled on top.
This makes borrowing money from family or friends that much more appealing – and affordable – than taking a bank mortgage.
The purchase of a home is a major commitment. Relatives may be in a position to help with a cash loan much faster than a bank would ever approve. But while family member loans can be a win-win in many ways, there are also times when it can end poorly. For example, a parent may feel taken advantage of, or a child or grandchild might incorrectly assume that the family member loan was actually a gift.
To avoid any misunderstandings, here are four rules for everyone involved – both borrowers and lenders – to make family member loans work.
4 Tips for Successfully Accepting a Mortgage Loan from a Family Member
1. Write down your plan
Just because you are asking for a loan from a family member, you shouldn’t overlook formal loan processes.
Just as you would with a bank, you should present what you plan to do with the money. For example, are you buying a home that you plan to live in, or are you investing in an income-generating rental property? Perhaps you are starting your own fix-and-flip?
The family member who is lending you the money must understand and trust your repayment plan. That trust is gained by their being able to assess the type of property they are lending for, its value, and your ability to generate enough income to manage the property and repay the loan at the same time.
2. Be clear on the loan amount and its duration in your payment plan
State the exact amount you would like to borrow from your relative. Also, be specific about when you will pay their money back.
Do you plan to make lump sum payments, or pay in instalments? If you are planning monthly repayments, in which month will repayments begin? It is important to be very clear about these details, and both parties must agree to them in writing.
3. Define the interest rate
Although some relatives are not looking to receive interest, others may. Current mortgage interest rates are hovering around 17.5%. A family friend might only ask for 5% or 10%, and that way you both make something out of the deal. Beyond just the interest rate itself, define if it is compounded daily, weekly, monthly, or not at all.
4. Be clear about what happens if you don’t repay the loan
Defaulting on a mortgage loan from a bank can lead to the seizure of your property, and it can impact your ability to receive future credit. Likewise, there should be consequences if you fail to repay your family member loan.
Set an agreed fee for late payments, and define what can be repossessed if the loan isn’t fully paid on time. In some cases, the family lender might want to take over the title to the house. In other cases, the family lender may prefer to extend the deadline at a higher interest rate or with a reduced repayment amount over a longer period of time. The possibilities are endless, which is why you and your family member must negotiate and agree on these terms from the outset.
A real-life win-win situation
Olivia de Oliveira is a real estate investor, and the owner of Restoration Properties, LLC. When she bought her personal residence, her mother gave her a 30-year private loan at a reasonable interest rate (compounded monthly). They used a real estate lawyer to officially prepare a Promissory Note and Deed of Trust.
“My mum had money to invest, so I asked her to give me a private loan to purchase my home,” Olivia says. “I am paying her a decent interest rate, and the promissory note lays out terms just like any other mortgage,” she explains.
Olivia and her mother agreed to a 4 per cent late fee if Olivia’s repayment isn’t received by the 15th of each month, and if Olivia defaults on the loan, her mum can foreclose on the house.
In addition to the reasonable interest rate, this arrangement was very beneficial to Olivia because she saved on bank fees, and didn’t have to put any deposit down. This freed up her capital for other investments, and she can still write off the mortgage interest against her rental income taxes.
Olivia says things have worked out so well with the loan from her mother, that she is interested in lending Olivia money again for her next real estate project.
In Part 2 of this series, we take a look at 4 tips for successfully financing a mortgage loan to a relative.
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