I am looking for the potential pitfalls I could be about to fall in, and ways to mitigate them. I live in Australia.
My fiancee and I have roughly $100k in savings, which we want to use to buy a house in a few years.
My parents own two houses - their own home, which is paid off, and an investment property, which still has a significant mortgage. They aren't struggling to make their repayments.
I am considering using a significant portion of our savings (earning roughly 2.8% p.a.) to loan to my parents (paying roughly double in interest rate) at an interest rate that allows us all to benefit.
My parents have a loan that allows both additional repayments and withdrawals (up to the amount of extra that has been paid) with no penalty.
Some potential issues I have thought of:
This may effect how much, or under what terms a bank is willing to loan us. I imagine a bank would be more inclined to trust someone who has earned and saved their own money than someone who, on the surface, has been given a large sum by their parents. Although presumably only the bank I have the savings account with would even be capable of seeing this?
The money could not return. I trust my parents, but I'm obviously going to get something in writing. Is it worth getting something by a lawyer, or can I just write something simple myself and have everyone sign it? If both of my parents were to pass away before the money is returned, would that document be enough to ensure that the loan is returned promptly?
Tax implications: Will this count as taxable income for me? And if so, presumably my parents can still count it as a tax deduction?
Property prices collapse, and my parents aren't able to make their repayments, bank forecloses on the place and sells it, but not even enough to cover the outstanding loan, meaning my parents no longer have our money. (I could of course double down and pay their monthly repayments for them in this case).
So my questions:
Any other risks I have missed?
Any mitigations for any identified risks?
Anything I flagged as a risk that is not actually an issue?
Assuming you would advise doing this, what fraction of savings would you recommend keeping as a rainy day fund that can be accessed immediately?