Alan Hartstein
Athena Cocoves
Family members often assist children or siblings in the property market by acting as guarantors on mortgages. However, transferring property or a share of property becomes complicated when the process requires someone to transfer a mortgage to a family member.
How transferring property to family works
Transferring a property is a relatively straightforward process, especially compared with taking out an initial home loan. Additionally, transferring a mortgage from one property to another, in a process known as loan portability, is also relatively painless.
However, transferring a mortgage from one person to another is a far more convoluted process, which is not without risk.
Lenders generally understand that circumstances change, especially over the lengthy terms of a mortgage, and there are reasons why a homeowner may want to transfer their loan to a family member or friend. These could include divorce or separation from a partner, a son or daughter wanting to take over their mortgage from their ageing parents, changed financial circumstances, illness or other family reasons.
Complexities of mortgage transfer
Mortgages are — or at least should be — tailored to an individual or couple’s specific needs and circumstances. When other borrowers are involved, some form of loan restructuring or refinancing is required.
If you bought a property jointly with someone, you may be able to buy them out using the same mortgage. Or, if someone on the title dies, your lender may adjust your current mortgage for the ‘special circumstance.’
However, for most other circumstances, such as adding a new partner or spouse to the title, your lender must assess the new borrower, and you must submit a new home loan application for a new mortgage. Additionally, lenders in Australia must comply with Responsible Lending legislation. Doing so usually means redrawing the home loan accordingly to reflect the new owner(s).
In other words, rather than transferring an existing mortgage, the best practical option is for the lender to draw up another mortgage that is more in tune with the new owner’s circumstances.
» MORE: Is buying a house with a friend a good idea?
Ways to transfer a mortgage to a family member
There are three ways to transfer a property with a mortgage to a family member in Australia.
Gifting
Gifting means giving a family member a property. In this scenario, no money changes hands, but a legal process is still required. This involves obtaining a government document registering the transfer.
Stamp duty is usually payable on the property, though you’ll need to check if this applies to your state or territory. In NSW, for example, stamp duty is a percentage of the property’s true value when the title changes hands, so you’ll need a valuation.
If a mortgage is outstanding on the property, it does not automatically transfer when ownership does. Under these circumstances, you will need to tell your lender. They will then generally require you to pay the mortgage out before gifting the property to a family member. The new owner would then need to take out their own mortgage to pay out yours.
» MORE: Pros and cons of gifting property to children
Selling
Selling your property to a family member follows a similar methodology to a standard mortgage with contracts of sale for both parties to sign.
The critical difference is that you can agree to buy and sell the property for whatever price you want. When you buy or sell a property below market value, this approach is known as a favourable purchase agreement.
For example, say you own a house worth $600,000 that you want to gift to a child but still owe $100,000 on the property. You could sell the property to them for that amount. However, there are fees and charges you’ll need to consider.
» MORE: 10 questions to ask a real estate agent when selling your house
Transferring ownership
Transferring ownership of a property when there is still money owing on it — ‘transferring a mortgage’ — is in some ways similar to taking out your original mortgage. Tere’s a formal process involved that usually involves getting a new loan to pay out the existing one.
Additionally, a lender will usually want the property title transferred to the new owner before changing the mortgage terms or offering a new one. For example, say you want to add a new spouse to your mortgage or buy out an ex-partner. The lender will need to ensure they can contribute their share to the mortgage once their name is on the property title. If the lender does not approve the change, you will need to shop around for another lender.
Alternatively, suppose you want to buy out an existing mortgagee. This process will also involve a change of ownership, which usually means taking out a new mortgage to reflect the changed circumstances. Adding or subtracting someone from the property title is relatively straightforward and involves filling out the correct forms in your State or Territory.
Fees and taxes when transferring property
As with most things real estate-related, transferring a property involves fees and charges, even when no money changes hands. These costs differ between jurisdictions, so you should always talk to an accountant, a conveyancing solicitor or a financial planner with expertise in this field, especially if you are a pensioner relying on government assistance.
Stamp duty
Stamp duty is payable as a percentage of the market value of the property. All States and Territories charge some form of stamp duty for property transactions involving title transfers, though there are exemptions you’ll need to know about.
For example, stamp duty is not payable in NSW for ex-spouses or partners taking over a property title despite the changed mortgage situation.
Capital gains tax
Capital gains tax comes into play when selling a property that is not your principal place of residence, which is often the case when parents gift a property to a child. If you are unsure about your tax situation, you should ask an accountant for clarification.
Break fees
If you exit a mortgage early in the process of transferring the title, you may be charged break fees for things such as terminating a fixed-loan contract early.
Valuation fees
Stamp duty is still payable on the property’s current market value — even if you are transferring a property, often to a family member, for much less than market value. So, a valuation may be required to calculate the proper amount for stamp duty purposes. The valuation fee is payable by the property’s seller.
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