How can you pay 1% less on your mortgage while your parents earn 1% more on their savings?
Get your parents to put their spare cash in your offset account.
It’s something that Money’s chief commentator, Paul Clitheroe, has been doing for some time.
In our October 2016 issue he revealed this: “Our two working kids have a pretty chunky mortgage. Now in our early 60s, Vicki and I have a proportion of our portfolio in solid and safe cash. Things like term deposits. These are paying about 2.5%. Our kids’ mortgages are about 4.5%. So it makes sense for us and most others in our situation to get a loan document drawn up and put our money into the kids’ mortgage offset account. They pay us halfway between the rate we can earn and the rate they pay, so about 3.5%. We get a percentage point more, they pay a point less. Basically we harvest the bank’s margin. It is all secured by property and as the money is in an offset account, we have instant access.”
It sounds so simple I’m surprised that more cashed-up parents aren’t doing it.
But as Paul outlines, you need to be sure that you’ve set up the arrangement correctly.
A risk, of course, is that there’s nothing to stop the children from accessing the funds in the offset account and using them for their own purposes.
Then there’s the issue of non-payment. If the children fail to meet their mortgage repayments, the bank would be able to claw back the parents’ money in the offset account.
And another potential problem is: What if your child is in a relationship that goes sour? Who takes what?
“The parents have no rights with the lender or transparency over the mortgage of offset account transactions,” says Dominique Bergel-Grant, a director of
“It’s a complete trust situation.”
Bergel-Grant recommends that parents ensure the children have adequate personal insurances – for example, income protection – should they not be able to work due to illness or disability.
Putting the legal aspects aside, from a return point of view it’s a no-brainer.
The kids win by paying less interest and the parents win by picking up a bit more interest. Right now if you opt to keep your cash in an online saver, the returns after
tax aren’t keeping up with the cost of living.
Say, for example, you earn 2.5% and you’re on the top marginal tax rate, your net return would be 1.3% – well below inflation.
However, as Bergel-Grant warns, any income received would be taxable.
It’s also important that the money should not be treated as a gift by Centrelink, as this could have significant consequences on any current or future benefits that the parents may receive.
Which is why everything comes back to a solid document, some good advice and some good communication between the parents and the kids.
How to set up a loan agreement
Mortgage broker Michael Saliba, from Smartline Personal Mortgage Advisers, says there are two ways to set up a loan arrangement between parents and children. Both involve using a solicitor to draw up a document, which would cost between $1500 and $2500.
1. Parties enter into a loan arrangement secured by a second mortgage – usually this is on the home of the first mortgagee (the child). Approval would be required by the first mortgagee, who would need to ensure they have enough equity in the property. If there is, there are small charges for producing a title and listing the new encumbrance on it.
2. A higher-risk option would be to create a caveat on the title in the names of the parties lending the money, though this offers less security to them from a legal standpoint as the mortgagee would have all rights to the property if the initial loan was not managed and the property went into foreclosure. There is the potential here for the parents to lose their money completely and they would then have to pursue the amount through the courts.
First published in Money in July 2017