Taking Over Your Parents’ Mortgage
If your mum and dad are in financial difficulty and can’t make their home loan repayments, is taking over your parents’ mortgage an option?
Banks will generally not allow you to simply assume a mortgage title entirely so you’ll need to apply for a new home loan and the old loan will need to be paid out.
However, there are some solutions for taking over your parents’ mortgage with the help from a mortgage broker and solicitor.
Taking over your parents’ mortgage: how does it work?
There a number of steps you can take to help your parents with their mortgage in a way that protects both of your interests in the property.
It’s essential to be open with your lender and it’s crucial you seek the professional help of a mortgage broker, a qualified solicitor and any other legal adviser.
Can I just take over the mortgage title?
The reason is that a bank cannot simply approve a home loan with no property or security attached to it.
Since the property title is in your mum and dad’s name, the property will need to be used to pay out the existing mortgage.
The only exception to this rule is if the loan is an “assumable” mortgage by the bank’s definition.
This means the mortgage would have to be free of a due-on-sale clause and there would be a fee charged for assuming the home loan.
The problem is that due-on-sale clauses are on all modern-day home loans so assuming a mortgage is no longer possible.
Have you considered a favourable purchase?
Your parents could sell you the property at or below market value, otherwise known as a favourable purchase arrangement.
Your parents could even sell it to you at a price equal to the mortgage balance, baring in mind there will be stamp duty and conveyancing costs for transferring ownership, just like a normal sale.
The benefit of a favourable purchase is that you can avoid the costly expenses of a real estate agent.
Essentially, this is a new home loan application and you will need to be assessed on your ability to make the mortgage repayments. This is known as serviceability.
It’s a creative way of taking over your parents’ mortgage that benefits both you and your mum and dad.
Can I be added to the mortgage title?
Your solicitor can actually draft an informal agreement for their to be a mortgage in your name registered on the property title but your interest in the property isn’t protected because you’re not the legal owner of the property.
Essentially, you’re taking on part responsibility for the mortgage but you aren’t entitled to anything should the property be sold.
That’s why it’s essential you really consider the decision you’re about to make with your parents. Family ties can break down.
Alternatively, sit down with your lender or speak with your mortgage broker about what you would like to do in taking over your parents’ mortgage.
Again, you will need to submit a new home loan application for joint ownership of the property and you will be liable for stamp duty for either transferring or changing the property title to include you.
Both you and your parents’ income, credit history and overall financial situation will need to assessed for serviceability.
Does that mean there is equal responsibility for home loan?
Because both you and your parents are on the mortgage title, you are liable in the event that your parents can no longer make their mortgage repayments for whatever reason including in the event of death.
Can you just take over the monthly repayments?
Yes, you can, and you don’t need to disclose this to the lender either.
As long as the mortgage repayments are being made and the property title hasn’t changed, the lender is happy.
It’s more costly to the lender to sell the property in case of default than to prevent you from taking over your parents’ mortgage by making repayments.
Many sons or daughters in this situation choose to do this not only to help their parents but based on the understanding that the property will be left to them in the estate.
You should sit down with a solicitor and your parents to ensure that this is stated in the will of the estate.
What happens when both my parents' pass away?
After your parent dies, someone will be responsible for distributing his assets in accordance with his will or with the terms of his trust.
During this period of time, the trustee or executor of your parent’s estate will use the estate’s money to make the mortgage payments.
If you have the right to ownership and plan to live in the property, you also have the right to take over the mortgage.
You can let the lender know and may need to supply a death certificate to prove that you are now the rightful owner.
In cases like this, the benefit is that there is typically no capital gains tax (CGT) payable when the property transfers to you and the bank won’t charge you a fee for assuming the mortgage.
Of course, it’s not always that simple, particularly if you have siblings and close relatives claiming rights ownership in lieu of a will.
Going through a probate court can often cause huge family disputes.
How else can I help my parents?
Apart from taking over your parents’ mortgage, there a few solutions and tactics you can use.
Speak with the lender
Have your parents spoken to their bank about reducing or allowing a repayment holiday until they can get back on their feet or find another source of income?
Many lenders are will to allow this to avoid default, particularly if your mum and dad haven’t had a record mortgage default in the past.
Set up direct debit for your mum and dad
In some cases, old age can bring on forgetfulness and senility, which is a problem if your parents had been making their mortgage repayments manually. The simple solution may be to help your parents set up a direct debt on the bank account so they don’t have to worry about it.
Pay rent or board
If you’re currently living with your parents, help them out and pay board.
Encourage your parents to downsize
Mums and dads are often very nostalgic and emotionally attached to their homes and will fend off downsizing as long as they can.
The other reason is that they’re waiting for the right time to sell to get a good price on the property.
If it’s clear that your parents are struggling with the repayments or there is no way they can keep working and earning an income past retirement age, you can help them along by trying to not to move back home all the time.
Another tactic you can try is to take all of your possessions out of the house as well as clearing out other clutter.
This can help ease them into the emotional struggle of selling the family home.
Pay them to babysit
If you have children of your own, help your parents out with the mortgage by paying them to look after your kids for a weekend a month.
This can give you and your spouse more quality time, your parents won’t feel embarrassed to ask for help and you’re saving money on child-minding.
Pay them to look after your pets
If you’re going on holiday or don’t have a enough time for your cat or dog, give your parents some money to look after your fur babies.
It’s a lot cheaper than renting a kennel!
Use equity to pay out the remaining mortgage
If there’s only a small amount owing on your parents’ mortgage, you can use equity in an existing property, cash out and pay out the remainder of the loan.
In most cases, you can borrow up to 80% of the value of your property (based on a bank valuation).
Keep in mind, there may break costs if the mortgage is currently fixed.
Before you do this, you may want to protect your own interests and ensure that a will has been written up stating that you are in fact a beneficiary of the estate.
For more tips, the ‘Helping someone with mortgage problems’ page on the MoneySmart website provides some useful tips.
Why would you take over your parents' mortgage?
There are a number of reasons that you may decide taking over your parents’ mortgage is the right course of action.
The biggest reason though is that the parents want to remain in the family home.
Some of the reasons why your parents may need help include:
- They’re in financial hardship: This could be due to a life event like an injury preventing them from working or the death of a spouse reducing the household income.
- They’re reaching retirement: It may be that over the years the mortgage has been refinanced to purchase an investment property or to go on family holidays. Your parents simply won’t be able to pay off the home before they reach retirement.
- They’re living abroad: Perhaps they’re travelling a lot or living abroad a lot of the time and were planning on selling the property to you as a favourable purchase anyway.
What can go wrong?
Ultimately, taking over your parents’ mortgage is done on the proviso that you will be “taken care of” once your mum and dad pass away.
However, it’s essential that you check that you are named as beneficiaries in the property prior to this.
One thing that can stifle this from happening is that either your mum or dad remarry following the death of the other and there was no life interest set up naming either spouse as beneficiary.
For example, if your dad passed away a few years ago and you had been helping your mum pay off the home loan for an extended period of time until she too dies, the property could actually revert to her new partner, rather than you as the children.
A life interest is usually set to avoid this and ensure that the beneficiaries of the estate are firstly your mother and, after her death, the surviving children.
It’s essential that you and your parents have estate planning in place before considering taking over your parents’ mortgage.
Seek legal and financial advice
Taking over your parents’ mortgage, whether through buying the property below market value or helping out with the mortgage repayments, is a big decision to make.
Going about it the wrong way can prove costly in the long run with future legal disputes in the event of infighting, affecting your ability to borrow in the future and putting you under financial strain if you already have a home loan.
Speak to your mortgage broker or your lender first. They may be able to provide a solution.
After that, speak to a financial advisor and a solicitor about any other possible solutions.
Call us on 1300 889 743 or complete our free assessment form and we can put you in touch with a bank representative or a solicitor who can help you.