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Your parent(s) have said they want to help you into a home, but they are not quite sure how!

Often purchasing a home will be one of the largest purchases many of us will ever make. 

Sometimes family may be in a position to help you achieve this goal, however they are not quite sure how they can help, or what the options are. Personally, we love seeing families working together to achieve goals. 

This article provides information about some options your parents could consider when helping you purchase a home. The Mortgage Girls can discuss these options with you, and provide advice about structures and whether any of these options may be possible or appropriate for you and your circumstances. 

The following article talks about;

  • Family Gifting
  • Deed of Debt
  • Limited Guarantee
  • Springboard
  • Offset savings
  • Joint purchase

Family Gifting

Gifting is where your parents have funds available to give you a non-repayable cash lump sum towards the deposit or other payments for your home.  

There is no minimum or maximum amount for a gift. We have seen families help out with cash towards new furniture purchases such as a new fridge or washing machine, contribute to legal fees or credit cash directly towards the house purchase deposit. 

What the lenders will require

If you want to rely on a gifted sum to make up the deposit, lenders will usually require a signed gifting certificate confirming the details of the gift including the amount and the conditions attached to your gift (if any), they may also ask for evidence that the funds are transferred to your account for the purchase. 

Things to think about

Chat to an accountant to find out if there would be any tax obligations when gifting money.

Chat to your lawyer to understand any legal obligations / future implications of a gift. For example; If you're in a relationship and this splits the gift will be considered a joint asset unless there is a legal agreement in place which says otherwise.  

Gifting funds is incredibly generous, kind and greatly helpful for any home buyer to be able to get on the ladder sooner. However, for many this is simply not an option. This blog outlines other ways family can help you into a home.

Deed of debt

If your parents have cash, they are willing to lend you (but want you to repay the debt in the future), a deed of debt may be a good option. 

A deed of debt may be a useful way to increase your deposit, and at the same time decrease the amount you need to borrow to purchase your home.

What the lenders will require

The lenders will require a copy of the completed and signed deed of debt showing the terms agreed upon between the parties.

There are different ways to set up a deed of debt, a solicitor will help you write up the agreement. The most common way we see this is where parents pay a cash contribution towards a deposit and then a deed of debt is signed between you and your parents to record the debt. The deed of debt will usually record that the cash/debt is repayable to your parents upon sale of your home. 

Sometimes parents will want to include clauses to be able to call on repayment of the debt at any time, however most often the lenders request this notation in the contract to be removed. 

Your parents’ solicitor and your solicitor will need to check over the terms and put a formal agreement in place.

Things to think about

A deed of debt is a great safety net to protect the cash asset donated which has been loaned for the house purchase. For example; 

If unfortunately, your relationship split, and the house was sold the deed of debt would require that your parents’ loan is repaid before the relationship property was split. Or if you owned a business that took a downturn your parents’ contribution would be protected if you had to sell the property.

Limited Guarantee

A Limited Guarantee can be a great way to help a family member onto the property ladder, utilising the equity available in a family home to support the purchase.

How a limited guarantee works; 

The Limited Guarantee must bring total equity position to 20% for example;

  • Purchase price: $400,000
  • Your deposit: $40,000 (10% of purchase price)
  • Limited Guarantee: $40,000 (the remaining 10% to make 20% of the purchase price) 
  • Lending would be: purchase price $400,000 less physical deposit of $40,000 = $360,000 lending 

What the lenders will require

In order to proceed with a Limited Guarantee, we do need to confirm that the person(s) providing the guarantee can afford a mortgage loan of the Limited Guarantee amount, to show that if something did happen, they could make the repayments.

The bank would also need to confirm the family home being offered as security was acceptable and had enough equity to cover the limited guarantee.

Things to think about

> When/if the guarantee is removed (under current laws) the Guarantor(s) is still liable for the amount for up to 2 years after the removal.

> The Guarantor(s) will only be liable for the amount of the L:imited Guarantee decided upon.

> It is really important that with any Limited Guarantee, we do recommend that you and the guarantor seek independent legal advice in order to fully understand how the guarantee works and what the obligations are, and consequences if these are breached..

> By utilising a Limited Guarantee you may be able to avoid lending costs associated with having a deposit less than 20%, including Low Equity Premiums and Margins.

Springboard

A Springboard Loan can be a great way to help a family member onto the property ladder, utilising the equity available in a family home to support your purchase.

How a springboard works; 

A springboard must bring your total equity position to 20% for example;

  • Purchase price: $400,000
  • Your deposit: $40,000 (10% of purchase price)
  • Total Lending: purchase price $400,000 less physical deposit of $40,000 = $360,000 lending split into;
    Loan 1,
    Springboard loan: (joint loan with parents) to make the remaining 10% $40,000 (usually has a shorter term)
    Loan 2,
    Your loan: $320,000 (Total lending of $360,000 minus the springboard loan of $40,000)  

What the lenders will require

In order to proceed with a springboard loan, we do need to confirm that the person(s) providing the security can afford a mortgage loan of the springboard amount, to show that if something did happen, they could make the repayments under the loan.

The bank would also need to confirm the family home being offered as security was acceptable and had enough equity to cover the springboard loan. 

Things to think about

> It is really important that with any Springboard Loan, we do recommend that both the main borrower(s) and the borrower(s) under the springboard loan seek legal independent advice in order to fully understand how the springboard works.

> By utilising a Springboard you may be able to avoid  lending costs associated with having a deposit less than 20%, including Low Equity Premiums and Margins.

> Once the Spring Board portion of the loan is repaid the Springboard is finished, and your parents will not have any further liability under your loan. There is no time-frame for continued liability as with a Limited Guarantee.

Offset savings 

Maybe your parents are closing in on retirement and would like to keep their personal savings in case of their own need. 

How offsetting works?

With an offset mortgage your parents would be able to keep their personal savings in their name, while  offsetting the amount owing on your mortgage. The amount of savings they have offsetting your loan, at any one point would affect the amount of principal you pay interest on. The more savings they have, the less principal you are charged interest on. This means your interest repayments for the offset portion come directly off the principal of your loan, possibly shortening the term of your loan. Your parents would then have certainty they could withdraw their savings at any one point because the savings are in their name. 

What the lenders will require

Both you and your parent(s), need to set your accounts up to meet their offset lending requirements. 

Things to think about

Sometimes there is a monthly fee for offsets. 

There may be a maximum number of accounts you can have for the offset. 

To maximise the benefits of the offset, savings should be sitting in these accounts. 

Usually offset savings cannot be held in a Trust or company. 

People often set up the amount of lending on offset to equal the amount of combined savings you have or intend to have, with the rest of the lending locked into a fixed interest rate. 

Remember as soon as the savings are withdrawn your lending will no longer be offset and you will be paying interest on the full amount - it may be worth doing research, or getting advice at that point to see whether it's worth locking your lending in on a fixed interest rate.

It's important to remember with offset mortgages that you will be making payments on the whole amount of the loan, plus the current market floating interest rate whether your interest is offset to 0% or not. The idea is that all the extra funds you have saved, whilst not paying interest directly reduce the principal amount of your mortgage.

Joint purchase

Sometimes you could look at purchasing jointly with parents or siblings to enable you to get your first home. 

This could either be a joint purchase or an investment for one of the parties. 

What the lenders will require

The bank will require a full loan application for each applicant to understand their ability to service the lending according to the desired structure. 

The structure of the lending will all depend on conversations between you, your family, your solicitor and then The Mortgage Girls conversations with the bank to see how we can make it work for you. 

Things to think about

It is really important that when jointly borrowing with family members, that you both seek independent legal advice and have a clear exit strategy in place.

When borrowing jointly you would be jointly and severally liable for the loan and repayments, so the full loan would be in all names. 

Disclaimer

Nothing in this publication is, or should be taken as, an offer, invitation or recommendation to structure your loan in any particular way. The information contained in this publication is general in nature and should not be interpreted as financial advice. It may not be relevant to individual circumstances. Before making any investment, insurance or other financial decisions, you should consult a professional financial adviser. This publication is for the use of persons in New Zealand only. Copyright in this publication is owned by The Mortgage Girls Ltd. You must not reproduce or distribute content from this publication or any part of it without prior permission.”The Mortgage Girls Ltd believes the information in this publication is correct, and it has reasonable grounds for any opinion or recommendation found within this publication on the date of this publication. However, no liability is accepted for any loss or damage incurred by any person as a result of any error in any information, opinion or recommendation in this publication.

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