Many first-time home buyers, often younger people, are finding it difficult to get their first mortgage. With most banks requiring a 20 per cent deposit to obtain a home loan, raising the initial capital can be the most difficult part. Lifetime has a few tips (or mortgage hacks) for those hoping to give their loved ones a helping hand onto the property market.
1. Using your house as equity
You can help raise a deposit by using the family home or another property you own to borrow against to supplement the shortfall in the required deposit. Generally, in this case, parents borrow funds in their own name and basically ‘gift’ this to the children. While the banks will want to see this as a gift, you may wish to have legal documentation to protect all parties concerned.
2. Guarantee a loan
Another option is for the parents to provide supporting security. Trading banks generally operate on an 80/20 rule for their loan-to-value ratios, whereby 80 per cent of the loan is secured against the children’s property and 20 per cent against the parents’ property. With this, the child will be responsible for 100 per cent of the loan servicing, with the parent as guarantor for the portion remaining of the 20 per cent loan. Some banks will require parents to be co-borrowers for this smaller loan. It is encouraged to accelerate repayments to clear the loan and the parents’ liability as quickly as possible.
3. Use the First Home Loan
The First Home Loan, which is underwritten by Kāinga Ora, is an option for those who decide it would be better to get on the property ladder now. These loans only require a deposit of 5 per cent. If your child has a reasonable income, which can cover mortgage repayments but little savings, you can offer this lower deposit amount as your cash gift. However, the downside is that the mortgage can be subject to higher interest rates and there could be the condition of paying extra on the loan by either this higher interest rate or through a low-equity margin (LEM). If your child is earning $95K or less, or a combined wage with their partner up to a maximum of $150K they are eligible for this type of home loan. House price caps are part of the criteria.
4. Offer a cash gift
If you’re in a secure financial position, gifting cash to kick-start your family members’ home ownership can be the hassle-free option. The advantage of parents forwarding cash for a deposit is that the first-home buyers can choose to deal with whichever bank or mortgage provider that best suits their needs and taking advantage of the best interest rates available at the time.
5. Up the ante on KiwiSaver
The power of KiwiSaver savings is often overlooked. When your child reaches 18 and/or gets into their first job, suggest they contribute the maximum 10 per cent into a chosen KiwiSaver fund. As it is money they have never had, they won’t even notice when it is withdrawn every pay day.
Committing to maximum contributions makes a big difference to the speed in which the money builds up, and first-home buyers who invest 10 per cent are often pleasantly surprised when they come to withdraw the money for their first home, which they can do after three years of continuous investment.
Don’t forget there are other perks of contributing to KiwiSaver too — namely that individual homebuyers who have been in KiwiSaver for three, four, or five years respectively can receive a one-off First Home grant of $3,000, $4,000, or $5,000. For turnkey properties and new builds, the First Home grant is $2,000 for each year of KiwiSaver contribution. However, income caps do apply to First Home grants.
6. Focus on what they can afford
The banks do prefer buyers to have a 10 to 20 per cent deposit for most owner-occupied properties, but there are other options if your child simply can’t raise that capital. Help them do their research into turnkey properties, sometimes offered as land and house packages, whereby buyers purchase properties off design plans. Deposits required tend to be at the lower end for these and you’ll also find that First Home Loan house price caps are higher for new properties too.
7. Teach them saving habits
If your family member isn’t quite at the buying stage, but will be in a few years, it’s worth helping them prepare a manageable saving plan with an accompanying budget now. Learning good habits as early as possible is invaluable for building wealth through property or other means later. If the saving is on track, all the other mortgage hacks will fall into place more easily and planning for the future is easier.
There are many ways in which an adviser can help people of any age
Lifetime advises people to seek personalised legal and financial advice before entering into any such agreements as mentioned in this article to ensure they understand any potential risks.