The battle does not get easier for first home buyers needing 20% deposit. This is particularly pertinent to those in the Auckland market.
If you have a deposit under 20% then obtaining finance is harder due to Reserve Bank restrictions in place. Additionally, the cost of finance is higher, interest only and/or revolving credit facilities are not available and there is often a hefty ‘low equity premium’ to pay.
So having 20% deposit does make a difference. But say you have 10% and your parents are prepared to assist with 10%. How can this work?
They simply give you funds by way of a gift which is not repayable. A Bank will often want to sight a gifting declaration in this scenario.
Let’s assume that there is a couple wanting to purchase a property for $500,000 and there is $50,000 savings (10%). Another $50,000 is required to make the 20% deposit. Let’s also assume that one of their parents’ house is unencumbered (has no mortgage/loan against it) and/or has enough equity to cover the additional 10% required.
The structure would look like this:
Loan by parents and applicants (4 people) at 10% being $50,000 secured by a mortgage (security) over parents’ house.
Loan by couple at 80% secured by a mortgage over the property being purchased.
Loans and mortgages must be with the same Bank.
A suggested approach here would be to make the 80% loan interest only and make the loan for $50,000 principal and interest over the shortest possible term to repay that portion quickly.
With the same example $500,000 purchase price.
Guarantee from parents supported by the mortgage that the Bank holds over their property.
Loan by the couple at 80% being $400,000.
In this case it would be essential for the guarantee from the parents to be limited to $50,000 otherwise they would be liable for the total loan in the event of default.
Again in this case both properties are mortgaged to the same Bank.
A variation to option 1.
Parents take a loan from their Bank and on lend that to you. This could be done as a formal loan with regular repayments. I have seen loans repayable on the sale of the property.
Least favoured where all are owners/borrowers. In this case all parties are jointly and severally liable for the total debt.
It is highly recommended that legal advice be taken before undertaking any of these options.
Contact us today on (09) 476 1199 or email on firstname.lastname@example.org if you would like to talk to one of our team about getting into your first home.
Alfred Hugh says ...
Thank you Krisperdersen for sharing this post on deposit help from the family and best essays. All of the options you have shared seem really helpful. Option 3 is what is more reasonable and suitable for more, thank you.