Taking over your parents’ mortgage. Is it allowed?

July 13, 2020

elderly couple

It’s not uncommon for people to take over their parent’s mortgage as they get older. For instance, If your parents are facing financial hardship, struggling to make their repayments or getting closer to retirement, you may want to take over repayments on their behalf. It can also be a great way to get into the property market as a first home buyer. It’s clear that taking over your parent’s mortgage may have benefits for both you and your parents in the long run.

Banks won’t allow you to simply assume the mortgage title and take over loan repayments, so you’ll need to apply for a new home loan with the bank. Before committing to taking over your parent’s mortgage you may also want to consider what you want to get out of it. If you are wanting some ownership or interest in the property this might change the way you choose to take over the responsibility of repayments. For example, you want to ensure the property is left to you in your parent’s estate you’ll want to make sure this is in writing upfront.

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There are several ways the property title can be transferred between family members and each incurs slightly different costs. It’s best to look into the fees and taxes of your state before making a decision about what best works for your situation.

In this scenario, the recipient of the gift would still need to apply for a home loan on the remaining mortgage balance and will still need to pay land tax when they take ownership. The original owner may also need to pay capital gains tax on the transfer depending on whether the property is an investment property or their primary residence. The gifting of a property title may also need to be handled by a lawyer, so legal fees may apply.

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The property may simply be sold from one family member to another with a documented contract of sale of land. The buyer would need to apply for a home loan for the price of the property’s market value and pay this to the seller. The seller would then use the funds from the sale to pay out their remaining mortgage. The buyer will then begin making mortgage repayments to their chosen lender. This process accrues all the usual fees of buying and selling property, as well as costs determined by the lender.

Where a portion of the mortgage has already been repaid, the property owner may sell the property title for the price of the remaining repayments. For example, imagine there is a property valued at $500,000 but only $250,000 remained on the mortgage. The owner can sell the property for $250,000 (which is the balance remaining on the mortgage) and use the funds of the sale to pay off their loan. The buyer can then apply for a home loan for only $250,000 and begin to make repayments on this. As for selling the property at the market value, this incurs the usual lender fees and taxes. It is important to note that despite selling a property below market value, the costs of stamp duty and capital gains tax may be calculated based on the market value of the property.

If multiple family members own the property, the title can be adjusted to reflect changes in ownership split. Family members can be added to the property title through a Transfer of Land. However, if family members are already on the existing title, the share allocation between them can be adjusted to reflect who is the primary mortgage payer.

Although the costs and fees of transferring a mortgage are going to be dependent on the state you live in and the way you transfer the title, there are some general costs associated with a transfer.

For the original owner, or seller, it is likely it will include:

  • Capital gains tax (CGT), generally 25% of the total capital gain of the property sale, but the costs of this is dependent on your income as it’s added to your income tax for the year.
  • Valuation costs.
  • Legal fees.

For the new owner, or buyer, it is likely it will include:

  • Stamp duty or land tax, which varies from 3-5.5% of the property value depending on the state the transfer is make in.
  • Legal fees.

Remember, both the capital gains tax and stamp duty are calculated based on the market value of the property rather than the sale price. In some situations these costs may be waived so consult a broker if you are unsure.

As long as the repayments on the home loan are being made, your lender will be satisfied. So there is no reason you can’t make the repayments on someone else’s behalf.

However, it is likely that making these repayments will not legally entitle you to any interest in the property once the mortgage is paid as the title still exists in the name of the original mortgagee. If you choose to take over the cost of repayments with the understanding that the property will be left to you in the estate, it’s best to consult a solicitor and ensure this is stipulated in the will of the estate.

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Where a mortgage only has a small remaining balance, it is possible to use the equity in another property to pay out the loan. You will typically be able to  borrow up to 80% of the property value. If you have already made some repayments on your home loan you can use this equity to take on the remainder of a parent’s mortgage, as long as the total value of the two loans combined does not exceed 80% of your property value. This will allow your parents to pay out the remainder of their loan with the costs absorbed into your existing repayments.

Many parent’s offer to sell the family home to a child at below market value to help them to obtain their first property. In turn, the parents usually are able to move out and downsize. This can be a great solution for everyone. However, in order to be eligible for first home buyer stamp duty concessions the property must be purchased at market value.

With many new first home buyer concessions around it’s best to consult a broker who can help you understand which you may be eligible for.

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Words by Danielle Austin

Written by Refinancing.com.au

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