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Guarantees and deposit assistance

The many options of families helping with your deposit

With the Reserve Bank changes in late 2013 forcing most borrowers to have over 20% deposit there has been a much higher incidence 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 I have covered some of the more popular options.

Parental Guarantee

This option was once very common but has fallen out of favor with many Financial Advisers and Lawyers in recent years.  This involves parents simply 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
  • Simplicity - Often very little paperwork involved
  • 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


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 parents if you do not honour your end of the agreement


Loan for deposit

This is becoming the most popular way for parents to help their children in to a property. Parents 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 parents need to borrow the money for this they can do so using a Revolving Credit account alongside their existing home loan.  You can then make payments directly to this account and the interest is charged only to that account.  That way it is just like repaying your own loan but it is in your parents name

Pros
  • Risk to parents 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 parents if they have to complete a loan application for deposit


Gift for deposit

Last but definitely not least.  This is a great option if you have access to it.  The pros are obvious, you're going to get a head start on your home loan and we'll be able to secure you an excellent deal.  

The only cons are when this isn't an option for you... see above!



Every person's situation is different so I 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, I am 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

Cheers,


Adam

For the best Home Loan's in the Waikato.
Matamata, Cambridge & Te Awamutu Mortgage Broker, Adam Thompson.