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I'm a net borrower with a variable interest rate mortgage secured against my house. Let's say there is $200,000 owing and I'm paying 5% interest to the bank. It has a redraw at-will facility and I'm currently well ahead of the repayment schedule.

My retired parents have various investments and no loans. They want to have $20,000 available at short notice. The bank pays them 3% interest on that account.

The difference between 3% and 5% represents the banks margin. Why don't we split the difference?

Are there any hidden risks or problems with this arrangement:-

  • accept a deposit of $20,000 into my mortgage account from my parents,
  • calculate 4% interest on $20,000 while that money is there and pay this to my parents
  • enjoy reduced interest from the bank while that money is there
  • should they need the money, I would withdraw this from the account and transfer it to them

Are there any risks with this arrangement assuming there is not a family falling out?

(In this event, I guess they can write me out of their will).

  • In the U.S., home equity lines of credit can be frozen if the bank has reason to believe the value of your home no longer supports the full credit line. Can such a thing happen in Australia with the redraw at-will? – explunit Feb 24 '15 at 11:58
  • This is a great idea, but all I can really offer is my opinion that it seems ok. I would be interested, though, given that over a year has passed since you asked this question, whether you happened to go ahead with it and whether it has turned out alright? Perhaps you can add an answer and accept it yourself? – Tim Malone Jun 5 '16 at 10:00
  • @explunit I believe this migth be possible, however given the position, extremely unlikely. – WW. Jun 5 '16 at 22:42
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    @tim malone, we have gone ahead and nothing has gone wrong. However, doesn't mean there aren't risks I'm not seeing. – WW. Jun 5 '16 at 22:42
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    It seems that this might be described as borrowing money from your parents at a lower interest rate than an existing loan, and using it to refinance some of the debt. The parental loan might require immediate repayment, which is certainly a risk. Your home equity line of credit allows you to cover this eventuality, but if anything compromised your withdrawal privileges (ie. late payments, adverse credit item, etc...) it would leave you unable to pay the loan immediately. A risk to your parents certainly. – trognanders Mar 31 '17 at 17:16
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There are interpersonal relationships risks which you should consider. These are most likely to eventuate following a financial problem, and depend on your existing relationship. In this answer I'm going to focus on the financial risks. This is not financial advice, but my understanding as someone who has done this.

This is best thought of as a loan from my parents to myself. The main financial risks for my parents (the lenders):

  • I am unable or fail to repay the principal when called upon
  • I am unable or fail to repay the interest

To avoid these risks, I need to ensure that I am sufficient ahead of loan repayments that I have the full amount of principal available to repay at any time.

Redraw Facility While some loans may allow for redraw, you should check the fine print of your loan agreement. A redraw is like borrowing from the bank using existing collateral. There could be some circumstances under which the bank does not allow redraw, even though you are ahead of loan repayments. This might happen if house prices drop enough that you no longer have equity.

Offset Account To avoid this problem, the loaned money is best put in an offset account. An offset account reduces the interest on the loan. Importantly, the money in the offset account is yours. Withdrawal from the offset account does not represent a new borrowing but is a withdrawal from savings account. Savings are government guaranteed to some figure.

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