The many options of families helping with your deposit
With the Reserve Bank changes in 2013 forcing most borrowers to have over 20% deposit there has been a much higher rate of family assisting home buyers with funds towards their deposit for a home. There are a number of ways that this can be done and all have the pros and cons. Below we have covered some of the more popular options.
Gift for deposit
This is a great option if you have access to it and is by far the simplest option. The pros are that it is simple and clean for everyone involved when it is possible.
The main downside is that it limits protection for people giving the funds and can't be asked to be paid back at anytime. Also, there may be some implications for government subsidies for the parties giving the gifted funds. Getting really good legal and tax advice before entering into this.
Loan for deposit
This is becoming the most popular way for families to help their people in to a property. Families could choose to lend you the money and have you pay back regular repayments or simply have you pay the money back when the house is sold or when you are in a better financial position.
If families need to borrow the money for this from their own bank, this can be organised and is a good way to use equity in family property without the rest of the family being liable for all of the borrowers lending.
Pros
Risk to family is limited only to the amount they are lending you
Easy management of repayment of loan
Excellent flexibility as a borrower since you have cash available
Cons
Some people feel funny about transferring money and prefer guarantees
Minor inconvenience for families if they have to complete a loan application for deposit if they are borrowing money as well
Springboard Loan
You can find out more about that specific Springboard Home Loan product here.
Essentially this is using equity in your family's home and getting a small loan secured against the family property in the names of the buyers and the names of the owners of the family home to be able to get you to a 20% deposit.
Pros
Limits the risk of the family to the loan secured against their existing property
Easy management of repayment of loan
Cons
Family are liable for the debt so it can limit them in the future
Both existing loans and new loans all have to be with the same lender (Westpac or BNZ only)
Family needs to be able to service the extra lending
Joint ownership
This option is becoming much more common. In this situation your family may choose to buy the property 50/50 with you and therefore you have a joint liability for any lending.
Pros
Part ownership of a property without a large deposit
Guidance from your family as experienced home owners
The opportunity to buy out your family's share once you have increased equity
Cons
Joint borrowing means a shared loan account and lack of privacy
A cost involved in taking full ownership of the property in the future
Liability for family of the entire amount borrowed if you do not honour your end of the agreement
Parental Guarantee
This option was once very common but has fallen out of favour with most banks and solicitors and accountants in recent years. This involves parents guaranteeing your home loan by providing the bank you are borrowing from with a mortgage over their property and an assurance they will honour the obligations of any loan contracts should you fail to meet them.
Pros
No cash changes hands between family members
Cons
Restricts parents ability for further borrowings as bank assesses your lending as belonging to them also
Must use same bank as parents which may lead to not receiving the best deal
Complex to unwind once you have sufficient equity to standalone
Biggest risk is that you fall behind in mortgage payments and the bank choose to send both your property and your parents property to Mortgagee Sale
Every person's situation is different so we would definitely like to discuss your situation in more detail so that we can help tailor a solution that is going to be the best fit for you. This may also involve a discussion with a Lawyer or Accountant, especially where Family Trusts or Businesses are involved.
As always, we are here to help find the very best deal so if you, or someone you know, would like some advice on the best fixed rate options then get in touch.
Greg, Adam, Claire and the My Mortgage team
