Borrowing $200K from parents to offset mortgage

Lalex-ok on 03/02/2014 - 18:43

Hi all. Would really appreciate your opinions and advice on the following.

My parents are looking to place $200K into a term deposit for the next two years at approximately 4.3%. I have a $250K home loan and suggested to them that we take the $200K and place it in our offset account for the 2 years. Over that period I would pay them the 4.3% pa and offset my home loan interest of 5.04%. At the end of the 2 years (or whenever they need it) I would then transfer the $200K back into their account.

Has anyone here done something similar? What are the disadvantages and what am i not considering?

Thanks
Alex

Financial

Comments

  • slingyz on 03/02/2014 - 19:01
    +4

    Hi Alex

    Don't consider this as financial or tax advice without checking with an accountant but…here's my 2 cents.

    Considering that you are saving on interest on the 0.74% differential. I would say that it's a good idea.

    Your parents are no worse off than if they had put their money in fixed deposit at 4.3%

    From a tax point of view, it's also effective as your actual saving is 0.74% + (0.74% x your relevant marginal rate) = 0.9731% (assuming your marginal rate is 31.5%).

    Your parents will probably have to declare the interest you pay them as income in their tax return but they would have had to declare their interest earned from depositing their money at any bank regardless.

    So in conclusion - if your parents don't mind 4.3% return before tax - then go for it!

    slingyz

    • StewBalls on 03/02/2014 - 21:31
      +15

      Your parents will probably have to declare the interest you pay them as income in their tax return…

      I wouldn't; it's looking like an informal deal so it's gonna be all off the books anyway…win-win! :)

      • edgar28 on 05/02/2014 - 12:06

        i attended property investment talk before (7 years ago - if it is still the same) and you can't treat it as off the book……
        the interest you paid to your parents have to be declared

        and as per the below, it's better to have a written agreement with witness signed.

        • StewBalls on 05/02/2014 - 12:31
          +31

          i attended property investment talk before…

          Sorry, I didn't realise that we had an expert here! ;)

        • machej on 06/02/2014 - 01:41
          +3

          I watched Sky news business if that counts. :P

        • Givemethemoney on 06/02/2014 - 20:45

          I would be very cautious the ATO has a habit of changing their minds.

      • lonepine on 07/02/2014 - 19:03
        +1

        I wouldn't suggest declaring it either - from the ATO point of view, it is a free loan to their dear child, thats all.
        If they would have had to pay tax on their interest, they may be also happy for you to pay them a lower tax free interest rate.

    • lplau on 05/02/2014 - 11:29
      +3

      For such a large amount, you may need to get a stat dec written out in terms of how you got the money.
      You may get investigated for money laundering or something.

      Legally, your parents should declare the interest you pay them as income.

      However I guess you can justify the cash/bank transfers as "gifts" that you gave to your parents. lol.

      • [Deactivated] on 05/02/2014 - 19:52
        +1

        +1 to Iplau. The advantages of lending (from your parent's perspective) 200k to you off the books would be having a higher interest, tax free. If your parents are no longer working, they may not be taxed to begin with. The advantages of borrowing (from your perspective) 200k off the books would be a lower interest rate.

        From the perspective of the ATO, if you have not declared that you took a loan, and 200k magically appears in your account, you have just made 200k. That's a nice piece of capital-gains pie you are putting on the window ledge.

        P/S. I know someone who got investigated by the ATO because her dad helped out with the payments of the first instalment (home loan). They let that slide because it is a one off and only several thousand, but the investigation was thorough.

        • microsnot on 08/02/2014 - 20:48

          $200K from parents is a gift. It'll get flagged by banks to feds but is not taxable.

          You just happen to give your parents cash every year equivalent to the compounded interest with no electronic trail.

  • Conka on 03/02/2014 - 20:21
    +7

    What Slingzy said!

    We have done it, and it worked well. Win-win - for everyone but the bank :)

    Parents got easy access to cash at a high(er) rate; we saved on the offset.

    The rules we used:

    • We arranged to pay regular installments (monthly) and added it to their investment in our "bank".
    • As far as Mr. Tax was concerned it was Interest Free Loan.
    • If they wanted the cash, we had to make it available to them inside a few days.

    It comes down to trust. Your folks have to trust you.

    • cruise control on 07/02/2014 - 10:01

      Also, as long as the parents don't have special rights, just because they loaned you the money. E.g., they can't use the loan to guilt trip you into doing favours for them

  • kingsville on 03/02/2014 - 20:37
    +4

    My folks did this for us too.

    We all trust each other, but just so everything was clear we wrote down the details.

    • ukmark on 03/02/2014 - 21:40
      +9

      Absolutely, always a good idea to make these things official. It is not about trusting each other either.

      <My understanding, but I may be wrong>
      If the worst comes to the worst and you die, and you have no will, your property and assets automatically pass to your next of kin. If this next of kin is a child under 18, the assets could be liquidated and put in a trust fund. Your parents would have a devil of a job to get their money back. Just because you may have no child at the moment, who knows what may happen in the next year.
      </My understanding>

      • dealman on 05/02/2014 - 23:26

        This is the only problem here,
        Let's say you and your wife are killed in an accident. Things happen, that's why we have insurance.

        The house goes to your next of kin, If you don't have kids, I don't know how it works but it could very very easily get extremely complicated for your parents to get their money back. Easy way out would be for you to get simple term insurance on your name for the amount with your parents as beneficiaries.

        Excellent point Ukmark…

        Worse still if you die, and your wife doesn't feel like returning the dough… think about what happens then…

        • StewBalls on 05/02/2014 - 23:34
          +1

          Worse still if you die, and your wife doesn't feel like returning the dough… think about what happens then…

          Don't any of you guys have a will?

        • dealman on 06/02/2014 - 16:02

          If leaving everything to mrs, is there a need for a will ?

        • _Bruce_ on 06/02/2014 - 16:31
          +1

          Yes. You would not believe the sort of crap that goes on even within/between families when there is a potential to get a lot of money. Or even just starting from the level of 'but he wanted that painting to go to me'.

  • Mulga Bill on 03/02/2014 - 23:16
    +13

    I work for a bank BUT I am not a financial planner - this advice is general in nature bla, bla, bla… You will also need to take three things into account. Firstly, what if interest rates change in the next 2 years? If they go below 4.3% you will have to make up the difference (?). Not likely to happen but worth talking about. On the flip side if they go up you will be better off. Secondly, how does your offset account effect your repayments? Some offset accounts are set up where the repayments do not change, just the principal component of your payment ie higher the offset balance the lower the interest component but the repayment amount stays the same bringing the loan balance down quicker, reducing your loan term. I assume you will want a repayment offset account where the higher the balance in the offset account the lower your repayment become keeping the term the same. This way you can put the interest saving each payment back into the offset account as "interest" for your parents. This also increases the balance further adding to the benefit. (You will find the term deposit rate will be annual interest rate calculated annually whereas the offset interest will be annual interest calculated daily so adding the interest saving to this account each payment will compound the benefit). Finally, you may want to speak to your bank to see if you can set this up as a new offset account joint between yourself and parents on a "2 to sign" basis so that way together they have access to the money buy you will need one of them to sign with you for you to withdraw from it.

    • Hunter80 on 04/02/2014 - 06:48

      Great insight, I think you have answered OPs question and clarified for few of us as well. Thanks for great advice, especially the third point you raised.

  • sparkles on 04/02/2014 - 00:03
    +2

    Definitely talk to the bank about the effect on you repayments and whether getting the $200K back will be as easy as pie. Imagine the drama if you can't get it back for whatever reason.

    • kimmylala on 04/02/2014 - 23:48
      +2

      Offset accounts are pretty much like your everyday accounts, so it's a flexible way lowering your interest charges. It's only when u directly add money to the loan, that you would have to go through the process of a redraw

  • alex-ok on 04/02/2014 - 07:48
    +1

    Thanks everyone for great comments and suggestions.

    Alex

  • Euphemistic on 04/02/2014 - 09:16

    I you have brothers and sisters make sure they are happy with the arrangement too. We have done similar, although it's more like an early inheritance. No need to pay it back unless necessary (unlikely). A brother got similar, sister hasn't required it yet, but there is the option if it is required. The parents in law considered it a way of helping out their children in purchasing a home and had sufficient funds to allow it

    Make sure your parents are aware of their situation in regards to pensions etc. if it is a gift (or the tax office see it like a gift) it may also affect other centre link allowances for the next few years.

  • Candour on 04/02/2014 - 10:22

    only relevant if you do NOT have this at arms length
    NOT have problems with paying back in future
    NOT have a divorce later
    or estrangement from parents
    NOT have any risk of not going banktrupt and needing the money ASAP
    and NOT have anyone's needs or wishes change over the period
    and NOT be caught in legal tax dues which you evade
    etc.

    NOT advice.
    without prejudice
    not trained.

  • RichardRides on 04/02/2014 - 11:26
    +3

    Obtain your own financial or legal advice etc, but
    (1) put it all in writing … even though it's family it's worth making sure everyone agrees on exactly how it's going to work … doesn't have to be overly formal, but just write down the key bits that you all agree on
    (2) on the point about divorce/separation (if you are in such a relationship) then consider agreeing that if you and your partner divorce/separate then the loan is immediately repayable. The intent is to make it clear that the loan is not part of your shared assets. If you divorce/separate your parents get their money back. If they subsequently choose to make a new loan to you (as a now single person) then that's fine.

    • ilostnemo on 04/02/2014 - 13:36

      Do you really think in a divorce, the partner will give their share back.

      Putting your parents money at risk is a big play.

      • RichardRides on 04/02/2014 - 15:35

        The idea is that in an assessment of the couple's assets/liabilities the loan is listed as a liability.

        I think how it works is that if the parties can't agree on a split of the assets (and get Court approval) then the Court adjudicates. The Court would consider the written agreement re the loan and make it's repayment part of the asset split.

        But like I said … obtain financial / legal advice to be sure.

        • maximum on 06/02/2014 - 18:58
          +1

          One very clever idea my old neighbour had when he gave his son money was to have an agreement for a loan with delayed compound interest. When his son separated this agreement was upheld in the settlement and his son got to keep the whole of the gift plus some more.

  • pdperth on 04/02/2014 - 11:28
    +1

    You save .7% per year - ie $1400 per year. Your parents might be happier gifting you $1400.

    • kingsville on 04/02/2014 - 13:28
      +2

      but that would cost them $1400!

      This way, the parents are saving $6880 in tax! (200K x 4.3% x 40% marginal tax rate x 2 yrs)
      (but of course this all depends on the marginal tax rate…)

      • microsnot on 08/02/2014 - 20:54

        So basically you're willing to let your parents get done for tax evasion. Good son.

  • pdperth on 05/02/2014 - 09:12
    +1

    I am sure the ato would suggest that the interest still needs to be declared - otherwise the money might be seen as a gift which has implications on social security benefits.

    It may be preferable for them to pay 1400 a year rather than lose control of 200,000 for a year. Gifting at this level would be below ATO limits.

    You would need to know the situation in detail.

    • chukkii on 05/02/2014 - 13:19
      +1

      Yeah like OP said previously:

      I wouldn't; it's looking like an informal deal so it's gonna be all off the books anyway…win-win! :)

      So in otherwords I think he's going to be saving money by "keeping it off the books" and from the tax office

      • lplau on 05/02/2014 - 14:50
        +2

        Yea the OP is thinking of doing the dodgy and keeping everything off the books and prob will pay the parents in cash so there is no paper trail.

        • horsome on 07/02/2014 - 23:53

          Um… making full use of financial institutions to facilitate this scheme aint "off the books"

  • danyool on 05/02/2014 - 11:06

    Another thing to consider is what you think interest rates will do over the next few years. You can get some pretty good fixed loan rates at the moment eg CUA 4.89% for 3 years. So if they want their $200k back in 2 years, you'll be at whatever the rates are then for that last year. Is it going to be huge difference? Who knows?

  • jcsantos on 05/02/2014 - 12:35
    +1

    good deal if your parents agree … win-win .. this if they trust you

    • lplau on 05/02/2014 - 14:49
      +5

      Lol, you must be a pretty bad son/daughter if they don't trust you.

      • hahaboy on 05/02/2014 - 21:28

        I'd be worried about trusting my kids if we are talking about a 200k loan too. Not saying, i wouldn't do it, but it still needs a lot of consideration.

  • lplau on 05/02/2014 - 14:55
    +2

    There has been multiple articles by investors and what not online.
    Never lend money to somebody you know (e.g. reletives/friends/family), it will often end up badly.

    If you do lend money then don't expect to get it back or else it will end up badly. lol.

    If you do, then make everything formalised, get a lawyer, get a contract written up, what happens if you don't pay it back? etc. etc.

    If you don't formalise anything, then lets say in the future you happen to have a gambling habit and gamble everything away and have no way to pay them back?

    Broken Family, Broken Relationship …. etc. etc.

    Its all about what if's. Do you want your parent's to always look over their shoulders and keep hoping that they will eventually get their money back? and everytime you have a financial issue, you worry the hell out of them.

  • _Bruce_ on 05/02/2014 - 15:16

    Another thing to consider that hasn't been mentioned: What if you get sued for some reason and a dept collector comes after your assets? You will need to prove that the money is not yours or it will be gone, and your parents will lose out too.

    PS: Not a Lawyer, could be wrong.

  • Cluster on 05/02/2014 - 15:49
    +3

    This sounds like a good deal for you and your parents. You get cheaper money and they get the interest instead of a bank's shareholders, effectively keeping the money within the family. Win-win.

    At the very least your parents should declare the interest received as income on their income tax form. It's a significant amount of money per year.

    Doing the above will protect you from unexplained wealth laws. Basically, depending on where you are in Australia a government can ask where the $200k suddenly appeared from. It could be the proceeds of crime, so you'll have to explain it's a loan and from whom. If it's a loan then there's interest involved, so the ATO becomes involved, etc etc. You could play dumb and say it's interest free, or try paying the interest in a brown paper bag to avoid electronic evidence, but the ATO may not believe you.

    Your parents can gift you some money, but depending on how close to retirement age they are it can affect their pension. Get some advice if this applies.

  • save my dollarydoos on 05/02/2014 - 18:44

    Any suspect transaction(s)that seem out of the ordinary amounting over $10k require explanation

  • wtfnodeal on 05/02/2014 - 22:29

    Depending on your parents age if contributed to a super fund interest could be fully tax exempted and they can still withdraw the money from the super fund if they meet the release requirements. As for you if the home loan is for an investment property then interest you pay should be tax deductible. But like Cluster said you need to be careful to make sure it doesn't affect your parent pension payments.

  • anna10 on 06/02/2014 - 14:54

    As an observation, not all children are 'trustworthy'. Some are just careless by nature and get themselves and others into a mess that they don't seem to see coming and then don't resolve very well. That's why parents need to be covered. Otherwise they have what an economist said some years ago:

    KIPPERS - kids in parents pocket eroding retirement savings :)

  • anna10 on 06/02/2014 - 18:18

    Also, thinking of Wills in the case of both of you dying in a car crash. If they can't prove who died first, the eldest is deemed to have gone first. So the eldest's Will comes into effect, then straight away the youngest's Will, so that the youngest's determines the outcome.

  • DealzEddy123 on 07/02/2014 - 10:36

    in my simplified humble opinion, I somewhat agree with Tomleonhart.

    Unless your property investments are very well calculated and your watch the market closely, the average home purchase is not financially smarter than renting.

    im paying off a mortgage but i dont really have anything smarter to do with my money and if i wasnt id prolli end up buying stupid small things instead of saving it as cash anyway. so i thought i might as well die having an asset i can give someone rather than have blown all the money i earnt on nothing of value (because i dont have the knowledge/desire to invest in anything smarter)

    edit: totally didnt answer OPs question!

    yes, from financial perspective take your parents money rather than paying interest to the bank. Unless its investment property with tax break purposes. Although i decline a lot of my parents money so i feel less obliged to invite em over for afternoon tea lol

    • ilostnemo on 07/02/2014 - 11:07

      No one knows the answer.

      Every recent article also says the same, a lot depends on your circumstances.
      They still all say Rent is Dead Money.

      You are paying of an investment, they all go up and down along the way, gold, shares, exchange rates and property.

      You hit the nail on the head, when you said you will have an asset.

      All the articles even current ones say you should still aim to buy your own property if you're renting.

      Most people who rent, do so as they can't afford ownership.

  • donkeydoc on 07/02/2014 - 11:10

    Are you Anglo? Your parents should just give you the 200k and you can pay them back at any time, if you declare it as a gift you can keep the 200k haha! But seriously… Take the 200k, move your family into their home and rent your place out! Haha!

  • sintro on 08/02/2014 - 16:09

    The solution is to get out of debt as soon as possible with that $200k.

    You guys need to watch this.

    The Biggest Scam In The History Of Mankind - Hidden Secrets of Money Ep 4 - Mike Maloney

    https://www.youtube.com/watch?v=iFDe5kUUyT0

  • pebee47 on 08/02/2014 - 16:56
    +1

    Here's my 2 cents worth:
    Buy your home; pay off as quickly as possible (yes, that does mean buying No Frills, drive an old car, second hand furniture, get a second job stacking shelves/cleaning/anything to make money. Full offset is great.
    As soon as you can get a 1st investment property with as big a % of price loan as you can, using home as collateral. Don't buy a plaace you think you'd like to live in, but one where a renter wants to (head over heart. Don't spend too much, as traditionally first investment properties are the stupidest, and the one people wish they'd never bought. Don't buy in a block with a lift or a pool. you have no control over the misuse of either.
    A friend in the Real Estate industry once told me "just remember, there's a boom and a bust every 10 years in real estate" so study the price trends in the area you wish to invest in.
    Rent follows house prices generally, so it will take about 7 yrs for the rent to cover the repayments. (allow for the fact it may be vacant several weeks a year + repairs, rates, etc). After this it gets progressively easier to keep buying, using built up collateral to secure cheap loans for maximum tax break.
    It is said that if you own 4 houses outright you can retire comfortably: 1 to live in, 1 to pay all the properties' costs, 2 to live off.
    Remember, in 10, 15, 20 etc years, everyone will be saying "yeah, but you got in when the prices were really low"; just as we said it 25, 15, 5 yrs ago.
    Figures above are general, as I can't speak for every town every individual property. Nor exact point in every house price/interest rate scenario around Oz.
    BTW, I am a retired Finance Broker, so have had more than casual interest in this subject over the years.

Login or Join to leave a comment
Login Join