Using equity from parents.

[Okanemochi]

Hi,
Can anyone help me?
I have around $50k & looking at a place around $400-$500k.
My parents are willing for us to use some equity in their place (maybe $80-100k) which they own outright.
How are these loans usually structured? Do we usually pay off the borrowed equity first?
And how could I structure it so that it limits their liability?

Thanks thanks thanks in advance!

 

[Qlds007]

To limit their liability and based on the fact you can support the loan in your own right i would borrow 80% of the purchase price on the new security and get them to help you only with the required shortfall.

Rather than offer their property as security I would get them to take out a loan in their own name for the required amount and then in turn lend this to you at the same rate of interest as they are being charged.

This way you could take out an interest only loan for 80% of the purchase price linked to 100% offset account and make P & I repayments on their loan.

I am not a great lover of Family Guarantee loans so this is a cleaner easier version with the same result.

 

[Belu]

Richard - by doing it that way the parents wont have any security against their loan though will they?

 

[Qlds007]

Belu

Sorry you have lost me. Do you want to elaborate ?

 

[Belu]

if i am the parents, and i loan okanemochi say $80k, do i have any claim against the assets this is backing?

basically is the loan from the parents, in the above case, secure or unsecured?

i know it is family but stranger things have happened...

 

[Qlds007]

Sorry back with you.

Yes they can secure it by way of 2nd mortgage.

 

[Rolf Latham]

Assuming the first mortgagee will allow the deed of priority. I recall that in NSW they cant legally, but in other states they can /??

I ALWAYS suggest that at the least, that in this sort of scenario, that the parents at least take a caveat on the property. While this isnt an "actionable" instrument, it will prevent further dealings on the security such as further mortgages or a sale of the property

ta
rolf

 

[Jazza]

Hi,
Can anyone help me?
I have around $50k & looking at a place around $400-$500k.
My parents are willing for us to use some equity in their place (maybe $80-100k) which they own outright.
How are these loans usually structured? Do we usually pay off the borrowed equity first?
And how could I structure it so that it limits their liability?

Thanks thanks thanks in advance!

Keep it simple. I'd assume parents want to help rather than go strict fortnightly repayments like a bank expects.

Borrow as per usual on your own then put parents money onto your offset/redraw as an extra buffer after settlement.

Find out how soon parents want cash back and spread even yearly repayment over that time. Extra cash will reduce payments and give you a head start.

Put your agreement with parents in writing so you're all covered.

 

[Nathan]

Hey Okanemochi,

Hope your well.

I dont get your q, Like your parents paid off their house.

And now you want to put a loan on it? I am all for pushing yourself, however you have $50k Deposit. That @ 10% deposit is a $500k property.

If your doing it to save few $k on LMI then thats silly to put your parents through.

I guess we need to know more details on the purchase....

 

[Bradsdad]

$50k available doesn't necessarily equate to a 10% deposit on a $500k PP. Would be handy to know what state you were looking to buy in so approx costs could de detirmined. Once you head into the 90%+ LVR territory things become tougher and lenders available fewer.

In regards to obtaining funds directly from parents I believe you need to be careful with this if they are receiving a pension. They are restricted to the amount of cash they have in the bank. I appreciate the funds would be then gifted to you almost immediately but I believe there are also restrictions on the amount the can gift per annum.

I would suggest talking to Centrelink before heading down this avenue should a pension be involved.

In regards to a Family Guarantee/pledge loan, you can limit their liability. To avoid LMI you could use their property for the for the 20% deposit plus costs (less your $50k contribution). The debts would still be in your name and servicing would be based on your income alone (it is possible to use parents income if needed but I'm not a huge fan of this path).

Regards
Steve

 

[Okanemochi]

Thanks for the replies everyone.


Nathan, I am all for doing it by myself too, though this was something offered to me by them recently. So I thought I'd see what other people do or have done in this situation in the past.

Bradsdad, Am in Nth Rivers NSW, and am a First Home Buyer.
Gifting is not an issue as parents won't be able to qualify for age pension for at least 8 years and maybe not by then as their assets will likely exceed the assets test limits.

thanks again, and if anyone has any other ideas or examples I'd love to hear them

 

[Dragon]

Some interesting responses here.

I agree, if you have the resources to do it yourself, then go for it.

However, if you want to save money on mortgage insurance, then you can set up a limited guarantee ( we call it Family Pledge ).

Link - http://www.stgeorge.com.au/loans/home-loans/faqs/family-pledge.asp

The basics are that we take a limited guarantee against your parents property. It can be any amount , but generally is is 20% of the purchase price, which means you avoid paying mortgage insurance.

The reason this is popular is as follows :

- No need to show genuine savings
- Save on LMI costs
- It is a limited guarantee
- It is only enacted upon in the event of hardship if the proceeds from the purchase property fails to clear the outstanding loan balance.
- It can be released once sufficient equity is held in the purchase property ( either by capital growth , or loan reduction )

The reason I would suggest this is better than having your parents do their own loan and gift the funds is that they are protected more in the event of a mortgage possession.
They would also not need to provide any details on their income or asset position to obtain a separate loan. We take a 2nd mortgage behind their existing mortgage.

Hope this helps.

 

[Peter_Tersteeg]

As a first home buyer in NSW, it should be fairly straight forward to purchase with a 10% deposit. You also get the grant and stamp duty exemptions. You'll probably end up with an LVR around 85% and there are some options which may be very cheap in terms of LMI.

My personal view is that if you can do it without involving your parents, it's by far the best way to go (you avoid putting them in a potentially difficult position and if they're anything like mine, not having to deal with the emotional blackmail is worth a lot more than LMI).

It is possible to get a limited guarantee from parents. This uses their equity to fund the first 20% then you get an 80% loan for the rest of the property. I'm personally not really keen on this as it cross-collaterlises the two properties, but it may be a viable option for you.

 

[Nathan]

Thanks for the replies everyone.


Nathan, I am all for doing it by myself too, though this was something offered to me by them recently. So I thought I'd see what other people do or have done in this situation in the past.

Bradsdad, Am in Nth Rivers NSW, and am a First Home Buyer.
Gifting is not an issue as parents won't be able to qualify for age pension for at least 8 years and maybe not by then as their assets will likely exceed the assets test limits.

thanks again, and if anyone has any other ideas or examples I'd love to hear them

All good,

If they are willing and it works for both then its great.

My thought is it puts your parents at maximum risk to save you a few k on mortgage insurance.

Just remember there are ramifications of using equity of your parents. There are always alternatives. Seeing your a FHB thats great and you shouldnt have any dramas as 10% dep and $14k extra + no stamps.

Speak to a good broker, and you should be right to go ahead by yourself with no support.

Your in a good position to be purchasing with your savings. The only other hurdle would be your serviceability. But once again, if you have saved the $50k, then shouldnt be a problem.

Goodluck.

 

[Aaron Sice]

put the parents in a home.

take their estate.

buy a ferrari.

what was the question?

 

[Aaron Sice]

and that was a joke