No Deposit? – No Worries!

by | Jun 10, 2021 | 1st Home Buyer, Refinancing

No Deposit? No Worries! – Family Equity Loan’s Explained

With the 20% Deposit requirements and ever increasing House Prices in Auckland, 1st Home Buyers are finding it harder and harder to get into their first home.

An example is a couple back in 2014 pre-approved for $550k looking to buy a 3 Bedroom in Mt Roskill. They found a house for $540k but decided not to pull the trigger as it “wasn’t worth the price” and needed “too much work”.

You can probably see where this is going next…

The same couple now pre-approved for $600,000 are still looking… But in South Auckland as they’ve been pushed out of the Mt Roskill Market.

And as for the House they decided Not to buy it’s now worth $750k + which equals $100k capital gain per year.

Or how about the couple who owned a home, sold it hoping to upsize and rent for just a few months, a few months turned into half a year only to find they could only afford the same type of home they were already living in – let alone a bigger one!

Simply put house prices are increasing at a much faster rate than most people’s ability to save for a deposit!
So the following are ways that we have been using to help our clients as 1st or even 2nd home buyers get into a decent property ASAP.
As this requires the assistance of Mum and Dad or other family members, I appreciate this may not apply to a lot of readers out there. And for those that do have parents that can help should consider themselves very lucky!

However a quick note, often times parents are initially reluctant to help. We’ve found that this is generally due to a lack of understanding and F.E.A.R (false evidence appearing real). With the right advice and guidance these same parents jump at the opportunity to assist their children with what could ultimately be the most important act (financially) that they do for their children that set them up for life.

Here are the techniques…
Gift

home-gift

The easiest and most simplest method. If Mum and Dad have a spare wad of cash available they simply pass this over prior to settlement alongside a letter (for bank purposes) stating that the money is not a loan and is non interest bearing.

The baby boomer generation whom own a significant percentage of NZ property are often considered “asset rich, cash poor”…

So for those whose family don’t have a wad of cash keep reading:

Cross Security

This is where the bank holds both properties as security. This is the banks prefered method and therefore my least prefered option (remember I work on behalf of my clients best interests – Not the banks!).

Side Note: If the kids and Mum and Dad walk into their local branch to arrange a pre-approval, chances are this is the only method they will reveal and be willing to discuss.

Here’s how it works. 

Let’s say Sarah & Peter wish to buy a $600k Property but only have $50k saved. On their own based on just a $50k Deposit the LVR is a whopping 91.66% – much too high for the bank as it’s above the 80% threshold.

Numbers Below:
$600K – Purchase Price/ Value
$50K – Deposit
$550k Loan / $600k purchase price = 91.66 % LVR

Now Sarah’s Parents have kindly offered their own home as security. Even though they still have a $200k Mortgage themselves the fact that their home is worth $700k + is key. Here the Banks take the Overall Loan to Value (LVR) into consideration.

Sarah’s Parents
$700k – Value
$200k – Mortgage
28.5% LVR

Total Overall LVR
$1.3M Combined Value
$750k Combined Lending
57.7% LVR

Success! Now we are well within the 80% threshold.

Just keep in mind with the bank having all properties tied together there are many implications with this method. If the parents wish to sell up, equity must be found somewhere otherwise debt must be paid off to get back under 80%. Or perhaps the kids can’t afford their repayments due to unforeseen circumstances and the loan defaults – this places risk on the parents and they need to be able to afford the kids as well as their own mortgage!

So what is the best method?

Family Equity Loans

Similar to the above concept, except an actual mortgage or ‘Loan top-up’ is raised against mum and dad’s property only to the extent to make up the required 20% Deposit. This is key! Mum and Dad are not liable for the whole loan!

With the above numbers Sarah & Peter have $50k saved so they need just another $70k to get to a $120k Deposit (20% of $600k purchase price). This comes in the form of a loan secured over Mum and Dad’s property, that can actually be split off and separated from Mum & Dad’s existing mortgage.

Sarah & Peter can service this smaller loan (technically their parents) as well as the loan on their new property.

Sarah & Peter like the idea of limiting Mum and Dad’s exposure even further so they aim to pay this $70k Loan off as fast as possible.

They then go ‘Interest Only’ on their main loan and what they would have normally paid in principal on this, they instead pay it on their parents loan to pay down this debt asap.

Chances are in a year or so their new house is now worth significantly more so they can get a loan top-up on their property and use this to clear mum and dad’s debt in full.

Vioala! – There you have it! No need to wait for the market to hopefully correct or wait until you have saved enough.

Need help? Have Questions? Get in touch!

021 022 17130

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