Getting a home loan is still possible, despite the numerous hurdles that first-home buyers need to jump through—loans with a 10 per cent deposit can still be approved with help from a few different areas, including the ‘Bank of Mum and Dad’—so what are some ways that parents can help? (If they are offering, of course!)
A guarantor is a third party to a home loan, helping you to get a loan by offering additional security support. Guarantors are generally limited to spouses or immediate family members. This gives you a boost to your deposit and the banks an assurance that the loan conditions will be met.
Parents usually provide their house as security for the 20 per cent deposit portion (less any cash like your KiwiSaver deposit). Often parents are co-borrowers of that 20% portion (less deposit cash) but essentially it’s the kids paying the loan. Banks will be fussy (think Responsible Lending Code) on the guarantor's financial position and a full financial analysis and application is required from the parents.
Signing on to be a guarantor is a big commitment, because if the borrower is unable to meet the repayments, the guarantor will be responsible for repaying the debt on the guaranteed portion—or the property that was offered as additional security could be sold to repay the debt. Parents usually need to seek legal advice prior to committing to a guarantee.
A gift can seem like the most straightforward option, as it usually just requires a gifting certificate for the bank issuing the mortgage, is tax free and doesn’t have to be reported to Inland Revenue.
In some cases, ‘Welcome Home Loans’ will allow a 90% loan with 10% fully gifted. Otherwise a parent may provide some cash to help boost a deposit to 10% or even 20%. Sometimes kids will elect to gift back the money at a future stage.
Deed or Acknowledgment of Debt
This is basically a cash loan that is non-repayable, non-interest bearing and only repaid on sale of the house. Often parents will use this to protect their money from future relationship break ups.
Parents buy a property to 'Rent' it Back To The Kids
This is where the kids pay the mortgage and then purchase the property at some point in the future when they have built up equity in the property and can raise the finance themselves. They can also reap the benefits of any capital gain.
There are a lot of options, and pros and cons for each—so seeking advice from a trusted mortgage broker is essential to know what might work for your own family situation. If you are exploring these options, get in touch with our friendly team for a no obligation chat.