HOW TO FAST-TRACK YOUR WAY TO HOMEOWNERSHIP🏡The Bank of Mum & Dad
According to the latest research from Consumer NZ The Bank of Mum & Dad or BOMD, is the fifth-largest lender of owner-occupied loans for young home buyers. So how exactly does The BOMD work? Here are some of the most common ways BOMD can help you get into homeownership sooner:
Using equity in the family home. 🏡
One way parents have been able to help their children if they are struggling to come up with the required deposit for their own home, is to borrow against the family home to make up the difference. Typically, parents take out a loan in their own name and give the money to their children as a “gift” where it doesn't need to be repaid or a “loan”, which will need to be repaid at some point. If it's a loan then the bank would need to take this into account for any lending you require for your new home. You would then make sure that your mortgage was structured in such a way that you repay the parent’s loan as quickly as possible. It's also important to have a Deed of Acknowledgement of Debt drawn up by a solicitor to ensure everyone involved is protected.
The Gifted Deposit.💰
A gifted deposit is a sum of money given to a homebuyer by a parent or a close family member that is then used as part of the deposit on a home purchase. The money is given as a gift, with no expectation of repayment. The person providing the gifted deposit will need to sign a statutory declaration stating that the money is a gift and doesn't have to be repaid. Whilst gifting is accepted by lenders as a deposit, they generally prefer that you are contributing at least 5% yourself through your own savings or KiwiSaver first home withdrawal in addition to the gifted sum.
The Guarantor. 👍
If your parents have enough equity in their home, then they could act as a “Guarantor” on part of your loan. This means they will need to provide a guarantee to the lender that they will cover any missed payments if you're unable to meet them. This can be a good option if your parents don't have the cash to give you, or if they're worried about giving you a large sum of money that could be lost if you run into financial difficulties down the line.
How does it work? In most cases, 80 percent of the loan is secured against the child's property and 20 percent against the parent’s property. This means that the child is responsible for servicing 100 percent of the loan, while the parents serve as guarantors for the remaining 20 percent. You would make sure to structure the lending in such a way that you repay the parents' loan as quickly as possible in order to clear their obligation.
The Co-Borrower.🧑🤝🧑
Also known as a Joint Borrower or Co-Own. This option is more suitable for parents that are working full time as all incomes will be taken into account for debt servicing. If you and your parents are happy to borrow together then you would all be responsible for the loan and its repayments, meaning the entire loan would be under everyone's names. This option definitely requires all parties to make sure they seek independent legal advice in order to fully understand what they are signing up as any defaulted home loan payments may adversely impact all co-borrowers credit ratings and their ability to take on any other loans in the future.
So as you can see there are many ways to get onto the property ladder whether you have support from your family or take advantage of the government assistance on offer. It's a good idea to involve a Mortgage Adviser right from the start to help you and your family work out which options are going to be right for you. With the right preparation and advice, getting onto the property ladder could happen sooner than you thought possible!