Help your Children Buy a House Part 2

6 mortgagematters

Help Your Children Buy A House – Part 2

If you’re thinking about helping your kids get on the property ladder, here’s the final part of everything you need to know.

Last month, we looked at gifting or lending your children a deposit. This month, we continue with the remaining factors you will need to consider.

How big does the deposit have to be?

If you are thinking about gifting or lending your kids a deposit, you’ll probably want to know how much it needs to be. Most lenders will require a deposit that is no less than 20 per cent of the price paid for the property. Some banks will lend when the deposit is less than 20 per cent, but they can only do this for 10 per cent of their total portfolio. Some non-bank lenders offer low-deposit loans, and this can relieve the pressure of pulling together larger deposits.

However, loans that are more than 80 per cent of the property value may incur additional fees and/or a higher rate. So, if you can afford to lend your children a bigger deposit – it might save them money.

Acting as guarantor

Signing as a guarantor means putting up equity in your own property as a security for your child’s loan. In the event where the child can no longer meet the repayment requirements, a guarantor is also legally responsible for paying back the entire loan in full. The issue many parents come up against in the role of guarantor is they struggle to pass the stringent stress testing of the banks. When a loan backed by a guarantor is processed, the lender must not only test that the owners of the home can meet the repayment requirements in a number of different situations, but also that the guarantor can as well. For this reason, guarantor loans are less popular.

Buying the house together

Instead of being a guarantor, some parents choose to buy the house in joint names with their children. This allows you to combine equity in your current home with any savings your kids have to make up the deposit, and, because you’re joint owners, the serviceability testing is done on all the owners collectively. However, because this option means that parents remain jointly and severally liable for the full debt, this option isn’t always popular for those parents keen to see their kids stand on their own two feet sooner than later.

For further details or feedback feel free to contact Ivan 027 577 5995 or email ivan.urlich@mikepero.co.nz Ivan Urlich is a registered Financial Advisor specialising in Mortgages. His disclosure statement is available free of charge on request.

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