Money Australia – July 2017

Both parties can benefit when the Bank of Mum and Dad comes to the rescue

H

ow 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 off-

set 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 portfo-

lio 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 situa-

tion to get a loan document drawn up and

put our money into the kids' mortgage off-

set 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

Leapfrog Financial. “It’s a complete trust

situation.”

Bergel-Grant recommends that parents

ensure the children have adequate personal

Win-win for parents and kids

Finance expert and author ofThe Great

$20 Adventure,Money’seditor Effie Zahos

appears regularly on TV and radio. She

started her career in banking.

How to set up a

loan agreement

M

ortgage broker Michael Saliba, from

Smartline Personal Mortgage Advis-

ers, 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 com-
   pletely and they would then have to pursue
   the amount through the courts.

Effie Zahos BANKING

insurances – for example, income protec-

tion – 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 cur-

rent 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.