Should We Re-Finance From Family Loan to Bank or Not?

LLaurana on 26/09/2018 - 16:35
Last edited 02/10/2018 - 21:03 by 1 other user

I've been visiting the forums for a long time now, and I have seen quite a lot of really good advise, so I thought I'd give it a try.

Our situation: My husband and I just purchased our first property in the ACT and have a mortgage with his parents where we pay 4% interest on the loan. We are now in the position to repay the loan and I am wondering if it would be the right thing to do.

EDIT: Thank you so much for all your amazing advise everyone! We decided that we'll sit down with his parents in the next few weeks, thank them again for the loan, and ask for their views on the loan and for them to consider things long term (as our position could change in the future). If they still want to go ahead, we could discuss rates or politely let them know that we will prefer to pay them back. Cheers!

Poll Options expired

  • 9
    Stay with family mortgage
  • 30
    Get a mortgage with a bank
Financial Home Loan Loan

Comments

  • dcep on 26/09/2018 - 16:37
    +2

    that 4% is fixed for life right ?

    stay.

    • Laurana on 26/09/2018 - 16:46

      Not quite. The loan agreement was "RBA cash rate + 2.5%", but my mother in law is pretty generous. So I don't see it going up. The agreement itself is also quite reasonable in the unlikely event that we can't make payments and whatnot.

      • sydsm on 27/09/2018 - 11:06

        If you do not feel that your in laws will take advantage of you personally or financially, then why change gears. Now if you feel the situation may change or your i.l's will take advantage of the situation (such as 'I helped you when nobody would lend you money'trash talk) then yes definitely move to a bank.

        But what is the upside of moving at the moment other than bank fees and most likely a higher rate? Stick with the family and give them the money…why not.

      • onevstheworld on 27/09/2018 - 11:37

        2.5% + RBA is a really generous rate.

        Even if you get a bank loan at a slightly lower rate, you've probably noticed most lenders have raised rates in the last month or 2, and are likely to continue that trend despite the RBA rate staying the same. The way the Australian economy is going, the RBA rate will probably stay the same for a long time.

      • nikey2k27 on 27/09/2018 - 12:29

        if you happy and they are happy I see no problem I have same on one of my houses. my dad reminded me about.

    • swapsey on 26/09/2018 - 16:46
      +4

      Agree with this. And you can't beat family profiting from interest rather than bank shareholders. What a great set of parents you have there! Jelly.

      • HighAndDry on 26/09/2018 - 18:04
        +1

        Yeah but you can yell and argue with bank staff and complain to the FSO about a bank, and you certainly wouldn't want to do that with family.

  • GG57 on 26/09/2018 - 16:37
    +2

    What is your parents-in-law's view? They may be appreciative of the income / investment return.

    • Laurana on 26/09/2018 - 16:43

      Originally, they asked that we repay the loan within the next 6 months/as soon as possible. On recent conversations, they seem pretty happy to get the income though. They're not living on it per se, so I don't think it would hurt the relationship either way.

      • GG57 on 26/09/2018 - 16:47
        +2

        I would broach the subject with them again and seek their view. They may be up for tax on the income, or they may have it structured in another way. I would also ask them to take a longer term view; do they think they will need that money in the next xxx years, as at that time you might not be in a similar position as now in arranging refinance.

        If you do refinance, you will incur costs for dissolving their mortgage registration and for the new mortgage establishment costs.

        • Laurana on 26/09/2018 - 17:54

          This is good advise. I'll broach the subject with them again and ask them to think a bit more long term. It's very interesting seeing everyone's feedback. Thanks!

          • ozbjunkie on 27/09/2018 - 15:15

            @Laurana: Just don't make it obvious you are paying them interest, pay a regular amount, and then stop when you have repaid the principal. Then, as a reward for being so kind as to lend you the money, offer them a gift of whatever the interest would be.

            Not financial advice.

  • salmon123 on 26/09/2018 - 16:46

    we pay them 4% interest on the loan

    Pfft - you're getting ripped off by them. You should've haggled harder … could've gotten mid-threes.

    Just wait till you have children, see what they do to the grand kids.

    • Laurana on 26/09/2018 - 16:48

      Heh, my husband was the one who negotiated with his parents, and I didn't want to be the one pushing for it. Specially since I thought it would be short term, and we were desperate to move.

      • Xiaomi on 26/09/2018 - 16:52

        My husband was the one who negotiated with his parents

        So it was higher than 4% initially? Strange, if the initial term was for only 6-months…

        • Laurana on 26/09/2018 - 17:00
          +2

          No, it has been 4% all this time. I'm pretty sure that the "RBA + X%" idea was my husband. By "negotiated with his parents" I meant that I took the "your parents, you approach them" since I didn't want to jeopardise the relationship with the in laws.

          • [Deactivated] on 27/09/2018 - 08:16
            +1

            @Laurana: Nice of them to put up the funds when you couldn’t get bank finance but cash rate plus 2.5% is far too high.

            A quick search on Canstar shows HSBC offering 3.66 as a non promo variable rate and a whole lot of other lenders near that.

            0.34% is a huge difference especially near the start of your mortgage due to the power of compound interest.

            Even 3.66% is way higher than they can earn on any other cash deposit add to that they aren’t paying tax on your interest payments to them. It could still be a win win if they match the bank rate but no need to be funding their retirement here.

  • Fier2 on 26/09/2018 - 16:59

    Staying with the parents is great especially if you are able to repay whenever you can . But also having the mortgage with the bank can be a great idea if you think about buying another property as they can keep a track of your repayments. Whatever you choose , you have great inlaw behind your back!

    • sydsm on 27/09/2018 - 11:08

      IMO banks dont care about track record - they care about future ability to repay vs current salary and default record. If she has no bad track record due to paying her in laws, than it is even better.

  • elgrande on 26/09/2018 - 17:10
    +1

    I would look to refinance with a bank if possible.

    If you and your partner divorced it might get messy for you.

    Is the property also in your name?

    • Laurana on 26/09/2018 - 17:50

      Yes it is =).

  • HighAndDry on 26/09/2018 - 17:11
    +5

    We are now settled in the house and can easily get a loan from a bank in a couple of months' time, but I am wondering if it would be the right thing to do.

    Yes.

    Don't mix business with family.

    Lower rates, offset facility, building both of your credit histories, ability to withdraw equity down the line, etc are just icing on the cake.

    Edit: Also, no pressure to answer this, but I'm very curious as to how an economist ended up in a position he couldn't obtain finance.

    • Laurana on 26/09/2018 - 17:48

      He was working for a political party and lost his job unexpectedly. It was quite the experience.

      • HighAndDry on 26/09/2018 - 17:50
        +1

        He was working for a political party

        OOOoooohhhhhh…… I don't know whether I should have a lot and a lot of sympathy, or no sympathy. I guess I'll settle for middle ground of normal level of sympathy. Hope he's got a job with a better/more stable bunch of folks.

        Edit: Also - probably don't mention which political party. I think no matter what you say, you'll end up with pitchforks haha. (Though free pitchforks, but still…)

        • Laurana on 26/09/2018 - 18:00
          +1

          lol, wouldn't dream of it!

      • singingwolf on 28/09/2018 - 14:31
        +1

        Is your husbands name Malcolm?

  • djkelly69 on 26/09/2018 - 17:54

    Are you sure you can easily get a bank loan? Most anecdotal reports indicate they have tightened their lending criteria significantly of late, so hubby (presumably) starting a new job recently may be an issue.

    • Laurana on 26/09/2018 - 17:58

      Not 100% sure until we go through it, specially given that they've tightened their criteria, but I feel pretty confident that we will get something once the 6 months employment comes through (though I heard it's only 3 months in some banks?).

      • HighAndDry on 26/09/2018 - 18:06

        I think generally it's something like 6 months employment at current job, with 3 months of payslips to prove current income.

        • Laurana on 26/09/2018 - 18:12
          +1

          Cheers, thanks. 6 months is what I originally thought, so it does look like we'll have to wait a bit longer. Good to start thinking about it early and investigate the different options.

  • JIMB0 on 26/09/2018 - 17:57

    Did you get a sign up bonus for taking out the mortgage?

    • Laurana on 26/09/2018 - 17:59
      +2

      We went out to a family dinner to celebrate… :P

  • Lucky Luke on 26/09/2018 - 18:01
    +4

    Its hard to make recommendations without very specific details, but here's a few general recommendations on the mathematical "best way to bank:

    -If the opportunity is available, refinance with a bank, and get an offset account.
    -Most offset packages come with a credit card, this credit card should have no annual fee.
    -Have all your salary come in to your offset account, and all of your expenses off the credit card.
    -Set up a direct-pay option on the credit card, so at the end of every month the FULL BALANCE of the credit card is automatically debited form your offset account.
    -This method maximizes the amount of days you have as much money as you possibly can in your offset account …
    … therefore saving the most interest on the mortgage as possible.

    Being an economist, your husband should understand Australia's position when it comes to mortgage rates at the moment.
    Your in-laws margin above the RBA cash rate is more than any prime lender's will be for at least the next several years.

    Regarding how you engage your bank, remember: they work for you, not the other way around.
    There is a 30% market share in Australia of people who don't own their home, and every bank is fighting for bigger slice of that.
    I can also assure you that the Big 4 Banks are on their best behavior right now - combining this with an unprecedentedly low cash rate, there's maybe never been a better time to get a mortgage.

    One more thing - financial literacy is really important. I'm making many assumptions here, but "boxing yourself in" to one method of growing your personal wealth is very risky.
    I'm referring to your comment "I took the "your parents, you approach them". I want to encourage you to investigate options yourself.

    The reality is we were taught how to bank by our parents, who were taught by their parents, who were taught by their parents (who lived through a depression). The way we have been taught to bank is completely irrelevant now. Which is why I'd recommend investigating as many options as possible … get a good accountant and consider starting a home business, then claim your interest on tax … there are many options out there. Good luck!!!

    • Laurana on 26/09/2018 - 18:07

      Thank you so much. This is all very good advise. I work in Finance and try very hard to keep the knowledge up, so I definitely don't take that approach in general, but I appreciate the encouragement.

    • Oz-Bargain on 27/09/2018 - 17:18

      Hi Luke great detailed reply and sound advice.

      My partner is looking at starting a home business so interested to know a bit more about the deductibility on the home loan interest and benefits vs cons.

      I have just done a quick bit of reading up on it after your post.

      From my research if your home business say has one dedicated room in your 3 bedroom house you may be able to claim around 25% against household running expenses - gas, electricity, water etc.

      You may also claim only the same percentage I assume against your interest expenses on your homeloan. So in this example 25% of your interest.

      However I'm interested to see what your thoughts were on the benefits of this as it sounds like it comes with a quite large con in that you may then be liable for a capital gains tax when you sell your home.
      Which may very well outweigh any interest deductibility benefits over the years.

      Lastly can the interest deductions go against one of the small business owners own tax liability say if my partner and I were both listed as owners of the business could I claim against my personal taxable income as I also have a job so have a larger tax bill or can it only be claimed against the expenses of the business itself?

      As you can see I'm trying to reduce the ridiculous amounts of tax I have to pay to the ATO each year :)

      Cheers

      • Lucky Luke on 27/09/2018 - 22:05
        +1

        Hi there! Your questions are going outside my area of expertise, but I can give you some information.

        Most home business utilities are mapped on an average over a 4 week period. Meaning you diarise your usage for 1 month, then multiply by 12 to calculate your annual business usage.

        I know your interest also factors as a business expense, but I don't know the calculation or its relationship to capital gains tax.

        There is also the additional layer of public liability insurance, business structure, and distribution of profits.

        I agree with you in stating that its important to minimize the amount of tax we each pay - which is why I'm such a big advocate of financial literacy.

        The best recommendation I could probably give here is track down a good accountant that specializes in small business deductions and PAYG offsetting.

        Understand that if you ask an accountant: "do you specialize in small business and offsetting my PAYG income?" They will all say YES, because they'll wan to secure your business.

        I would look for one on a friends or business colleague's recommendation, the same way you would look for a plumber or electrician.

        Get a good accountant to put together plan for you, then that cost is also a deductible expense as well. Sorry I can't be more help. Good luck!

  • Sofie519 on 26/09/2018 - 18:13
    +1

    Would rather pay Mum and Dad's bank than commercial lenders.

    I would recommend for you sit down with your in-laws, thank them for helping out when you needed them, and get into the conversation of whether they need the capital back, or would they be happy for you to continue paying 4% to them. Considering the OO rates, whether they may consider reducing the rate. I would completely let them make the call, as they were there for you when you needed. And they may also be the ones here for you for future needs. If they feel that they would rather keep monetary dealings out, then go ahead an refinance, but dont be disrespectful by making the decision and then inform them. Otherwise you'll never hear the end of it.

    They may be happy with 4% return, and you would rather pay them, than save at best $70pm paying commercial lenders whose rates have been raising rates out of cycle in this unsteady market.

    Family relationships are best kept, a rainy day can always appear around the corner when you might need their help again.

  • HighAndDry on 26/09/2018 - 18:36

    Considering the OO rates, whether they may consider reducing the rate. I would completely let them make the call, as they were there for you when you needed.

    This is why you shouldn't mix business with family.

    but dont be disrespectful by making the decision and then inform them. Otherwise you'll never hear the end of it.

    Another reason, but while I also recommend telling them in advance, I can't think of any reason why they wouldn't want the capital back - they could easily put it into another term deposit instead.

    Family relationships are best kept, a rainy day can always appear around the corner when you might need their help again.

    Agreed, but I'd rather save them for only rainy (thunderstorming) days.

  • usmanyousaf on 01/10/2018 - 08:41

    The bank loan with an offset looks appealing. However, I wouldn't go with the bank loans due to couple of reasons.
    1. Once the interest rates go up, you will start getting benefits of lower rates.
    2. There is no extra charges (late payment fee/annual fee) which is also great.
    3. paying interest to your family members/relatives is better than paying to banks. Not your loss but gain for someone you know.

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