I just had an interesting conversation with my dad a while back about the housing bust of 1981. They bought their house in 1977 for about $40,000 with a $471 monthly mortgage payment for a 25 year mortgage (Those numbers don’t work out quite right for an interest rate of approximately 10% at the time, but it doesn’t matter). They somehow also managed to put down 10% of the house’s original value every year (I think their tax rebate due to RRSPs may have helped out here), so in 1981 when the crash hit they were ok. When they went to renew their mortgage in 1982, they were quoted a 18.5% interest rate (just shy of the 20% peak). They didn’t have that much left on their mortgage after paying down 10% of the principal every year for the past 5 years, so they went to my grandfather (my dad’s father) for a loan. He loaned them about $10,000 at 14.5%. He was definitely not gouging them though; this was worse than the 19% he could get on Canada Savings Bonds at the time. They then took out a line of credit and paid the rest of the mortgage off using that. That was supposedly done to simplify the repayment terms (no longer stuck with a mortgage, can switch between loan-from-dad and line of credit more easily, and can pay down more principal whenever they wanted).
I don’t really have anything insightful to say there. Just that it’s an interesting story. The only thing I will bring up though is that I think everyone should consider the possibility of borrowing from a family member, or lending to a family member. You should be careful and think about that negative consequences if the borrower was unable to pay back the loan or make their payments. My parents payed back the loan to my grandpa, and then when they bought a rental property in the 1990s as an investment they borrowed money from my grandpa again. So it worked out well for them.
That is an interesting story. Aren’t there tax rules regarding loans, mortgages to family members? ie if the rate is below market then there could be tax consequences?
I’m not really sure about the tax consequences of loans between family members. I don’t think it would make sense for me to have to pay income tax on $10,000 given to me from my father because that $10,000 is already post-tax. So if the government taxed me, that would be double taxation. Unless my father was able to deduct that amount off his income, which would make it pre-tax.
I’m not sure of any other taxation issues here. If anyone knows of any please comment here.