How hard is it for First Home Buyers to get into the property market?
At a time when the media seem to have a love affair with property, and regularly report how difficult it is for first home buyers to get onto the ‘property ladder’, I can see how some aspiring first home buyers might despair. What often doesn’t get reported is that there are a number of young people buying their first homes, utilising a combination of personal savings, KiwiSaver First Home Withdrawals, HomeStart Grants and/or parental assistance (we touch on KiwiSaver First Home Withdrawals and HomeStart Grants later in this article).
Some aspiring first home buyers simply don’t realise the potential options available to them now, or perhaps a little down the track. Some seek advice early on, and put a plan in place that will assist them to achieve their goal. Others do nothing, spend everything they earn, and hope for a miracle.
Although banks are still lending to applicants with less than 20% deposit, they are limited as to how much they can lend in that space and tend to be more selective when it comes to assessing such loan applications. Applicants who do not have a better option (than borrowing over 80% of the property’s value) will likely be more than willing to pay the higher costs associated with such lending (which is commonly referred to as “high-LVR lending” – LVR being an acronym for Loan-to-Value Ratio) in order to achieve their goal. However, there are, I believe, a large number of young people with good jobs who do not realise that they might be able to buy their first home with a little help from their parents.
There are also a number of parents who don’t realise that they could help their children into their first home. We have assisted a number of young people into their first home, with support from their parents, and we believe that it is important to get the word out that parents don’t necessarily need to have cash savings to assist their children into a home.
There are various ways in which parents can assist their children into homes. They include the following:
A gift is probably the easiest form of financial assistance to explain. If the parents have cash available to them they could look at gifting a portion to their child/children. Sometimes this is intended as an inheritance-in-advance, and recorded as such in legal documents (we strongly recommend that parents obtain independent legal advice prior to making a commitment, regardless of the method of assistance offered).
Banks generally require written confirmation (from donors) that the monies are a gift, and not a loan.
There are a number of reasons why a parent might choose to lend money to their child/children, instead of gifting it. One of the most common reasons that we have encountered for parents offering a loan rather than a gift is to ensure that the monies are repayable (to them) in the event of the property being sold following the recipient separating from his or her partner. We have seen instances of gifted monies becoming relationship property, and being split between the recipient and his or her partner following a relationship breakdown (so loans are often preferred over gifts).
The two most common forms of parental loans are:
A non-interest bearing (ie interest-free) loan, repayable upon eventual sale of the property, with no encumbrances (e.g. Caveat or subsequent Mortgage) to be registered against the title (of the property that is to be purchased)
An interest-bearing loan, repayable over a certain period of time (with no encumbrances to be registered against the title)
The difference is in the loan terms. Interest-free loans are more beneficial to the borrower (the home buyer) as the borrowers only need to service the bank finance, and not the parental loan.
Interest-bearing loans need to be serviced, and the borrower would need to be able (in the bank’s eyes) to service the bank finance and the parental loan.
By definition a guarantee is ‘an undertaking to answer for the payment or performance of another person’s debt or obligation in the event of a default by the person primarily responsible for it’.
If a parent doesn’t have access to cash to assist with a gift or loan to their child/children, but has sufficient equity in their home (or an investment property), and sufficient income, they could offer a personal guarantee and a mortgage over their property as additional security, to help the borrower (ie their child/children) secure finance for a home purchase.
The borrowers are generally responsible for servicing all of the finance. And all going to plan, the portion of the finance that is guaranteed by the parents would be repaid earlier than the other portion of the finance.
The personal guarantee and the mortgage (which is held in addition to the mortgage security over the borrower’s home) provides the bank with the comfort of knowing that in the event that the borrower failed to comply with their obligations to the bank, the guarantor would be able to service the guaranteed portion of the finance from their own income. As such, lenders will require
financial information from both the borrower and the guarantor in situations such as these.
It is not unusual, in our experience, for borrowers to contribute the funds they have available to them in the form of savings, KiwiSaver First Home Withdrawals and/or HomeStart Grants, and for parental guarantees to be limited to the difference between the borrower’s contribution and 20% of purchase price (often around 10% of purchase price). Such an arrangement reduces the loan-to-value ratio (LVR) to 80% (as there is effectively a 20% deposit) and generally enables the borrower to secure better terms with the bank than they would have if the LVR had been in excess of 80%.
Different banks have different approaches to personal guarantees of this nature. Borrowers and guarantors alike need to be aware of their liability during the time that the guarantee is in place. Some banks offer better options for guarantors, than others. Loan structures should be conducive to the needs of both parties and should take their future goals and intentions into account. We consider it a critical part of our role to recommend the most appropriate option to our clients, based on their particular circumstances and goals, following an indepth analysis of the options.
As mentioned earlier, banks are still lending to suitable applicants who have less than 20% deposit, although the criteria are different (depending on the bank) and the cost is generally higher.
We would welcome your call if you are interested in discussing any of the above options in more detail, or if you have any questions to put to us.