Just curious if anyone has come across this. Basically, say the parents have a fully paid off property witch is worth 500k but no income.
Is it possible to borrow against or use equity of some sort? Or is it that basically need to see eligibility to pay off loan based on whatever is their income?
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Reverse mortgage is the only thing I can think of.
Thanks a lot. Thats exactly what i was after. It seems basically, bank takes equity stake in your property . I have to see repayment terms
Read and understand all the T&Cs. I've never heard a good thing about them.
Here's one good (kinda?) thing - they're generally non recourse loans ie the bank cannot hit you (or your estate) up for more than your house value, regardless of how high the loan balance has become.
The interest rates can be horrible. The effect of compound interest is working against you (if your parents borrow $1000 today and the house is sold in 20 years then the interest will really balloon, similar concept if you bought something on a credit card today and didn't pay it off for 20 years. Interest on interest)
Also what if they need to sell the property in the future? They might need to downsize or buy their way into a good care home.
Id really try and avoid it at all costs. Best case it eats away your inheritance. Worst case it really impacts the standard of living and financial options your parents have in their final years. I would rather just give my parents some money if they need it for a new washing machine/dentist/car etc
Are you using it to purchase another property or need the cash?
If the former, you can look at guarantor loans.
Thanks a lot. I would look into that as well. Thats really helpful
Going to need to downsize if they want to free up their income methinks.
If one has no income, how is one to pay the interest element of the loan????
Or are you wanting to use their house as collateral on your own purchase?
This is hypothetical scenario. Seems like financial products exists to cater to either of above needs to mentioned
The way things are going interest on a loan will pay you.
Anyone have idea on Guarantor vs Reverse Mortage. I suppose any good mortgage broker would be able to help with this
What is the purpose of the loan?
Like, reverse mortgage helps someone in retirement to improve their lifestyle. Personally don't think it is to help say their children to pay down a deposit…
Thanks for the tip
Assuming that you're wanting to use the equity in the parents' home for your own purpose? Loan in your name, supported by parent's property?
Guarantor can be useful if it's a limited guarantee like a family pledge - not sure but I think that's the only way banks will accept third party mortgages these days. Mortgage over the parents' place is limited to the amount required to bring the LVR down to 80% on the property being purchased eg purchasing house for $400000, need to borrow $400000, can't do 100% lend, but take a guarantee limited to $100000 over the the parent's place and suddenly your $400k loan is supported by $500k worth of security, at 80% LVR, no LMI required.
You then pay off your loan as normal, and once your balance reaches the point that the loan can be supported just by your house, you can get the mortgage over your parents' place discharged. However, before you reach that point, if you don't pay your loan, banks' first recourse is to sell your house, then take you to court for any outstanding balance. If you still won't cough up, then your parents will be on the hook for the outstanding balance, up to the amount of the guarantee.
Reverse mortgage borrowers need to be over a certain age (used to be 65?) and can borrow up to a low percentage of their house value. What they do with the funds is up to them, and usually there's no need to make repayments, but interest accrues and grows larger each month, instead of reducing, which is why it's called a reverse mortgage. Takes around 7yrs of no repayment for the balance to double….
Thanks a lot. That was very insightful. It seems both options are on the table. Probably the guarantor seems to be more common industry practice.
full paid off property with is worth 500k but no income
Nothing. You need cash flow to pay the loan off.
If they have a superannuation pension stream & dividend income that could be used to service a loan. Like $20k a year minimum.
Ask the Bank or a Broker
I would never ask my parents to go guarantee if they're retired with little income and not a lot of money (outside their own home)
Why would you expose your parents to that risk?
They will need an income to service the loan I suspect