We all know how hard it can be to get on the property ladder with your first home. Increasing house prices, Loan to Value Ratio (LVR) restrictions and tightening credit policies among the banks make it tough. Add to that the rising cost of rent, which can make it difficult to save the hefty deposit required to put towards a home of your own and you can sometimes be amazed that anyone can buy a house these days.
The good news is there is an option for those with no or little deposit.
In short, your parents provide a guarantee of a minimum of 20% of the purchase price of the new property. What this means is that they need to have enough equity in their family home or a rental property or holiday home and not necessarily their main house.
Here’s an example of how this would work –
You want to buy a house worth $300k and need a 20% guarantee. Your parents have a house worth $500k, and have paid off all but $100k of their mortgage meaning they have an equitable value of $400k.
You need 20% of $300k of available equity, which equals $60k. Because your parents have home equity value of $400k they can guarantee the 20% required of $60k.
In this case, the parents would have enough equity to provide a guarantee of 20% to the children. The children’s loan would still be for 100% of the purchase price – i.e. $300k – however the guarantee would make up the deposit or equity.
There are a couple of things worth noting: If you have, say, $10k in Kiwisaver or savings in the above example this would lower the guarantee amount to $50k. It means you can use your savings and a guarantee combined to achieve the deposit.
Your parents may have a freehold property (i.e. no funds owing to any bank) and this can be taken to provide the limited guarantee.
Secondly, you must be able to “service” the full amount of the lending in your own names/names. What this means is that you must be able to afford the loan of $300k in your own names as per the above example as well as all your outgoings.
If you don’t, or can’t pay your mortgage the bank can ask for the money from your parents! – hence why is it so important for yourself and your parents to take advice from a solicitor and be well aware of the risks beforehand.
If this is something you may be interested in it is best to have a one on one chat with one of our mortgage advisors, you can even bring your parents along to chat too.
We can do a preapproval for you based on the guarantee so you can start your house hunt knowing you will have the finance sorted for when you find your dream home.
This information is general information only and must not be relied upon as legal advice. A disclosure statement is available on request.