Mum … Dad … can you loan me money?

Since banks now require 10-20%, deposit on a house, and penalise those who don’t have at least 20%, younger people are struggling to get a foothold on the property ladder. I have seen an increase in enquiries from parents who want to help their children buy a first home.

Are you interested in learning about how parental equity works? I’ll show you three ways that parents can help their kids. For illustrative purposes, let’s say the property value is $500,000:

1. Parents offer their property as security

Parents can offer their property as security so that their children can then raise 100%, funding from a bank (i.e. $500,000).

If you’re thinking of taking this option, what we always insist on is having a limited guarantee on the parents’ property to the amount of the deposit that is required on the child’s property. So, let’s assume there is no money for an initial deposit on a house. The bank requires a 20%, deposit, which in this case would be $100,000. We would therefore limit the guarantee of the parents’ property to $100,000, plus bank fees and cost.

This means that if the client defaults on the loan, then their parents will not be liable for more than the amount of the guarantee. I find that when this arrangement is made through the bank, quite often the bank will take the whole property as security, rather than just a $100,000 limit.

2. Raise the deposit required against parents’ property

This option is reasonably simple. The client raises the deposit using their parents’ property as security. The parents use their personal position to obtain a loan, which is then gifted back to the client. This method allows the two properties to be kept separate (i.e. they would not be cross-secured).

3. Joint loan

The client needs to apply for a loan of 80%, at the bank. Then they and their parents apply for a joint loan of 20%. Once the 20%, is paid off we can release the parents and their property as security.

What’s very important to note here is that I often come across parents who have remained guarantors on their child’s loans for a long time, because nobody has proactively managed the process. I make sure to keep a timetable and follow up with my clients in a few years’ time to see if their parents can be removed as guarantors. It’s always good to remove the guarantors as soon as possible. Normally that’s quite easy to do, since the property will have increased in value during that time.

As always, there are implications when you choose to become a guarantor. I recommend seeking legal advice around your personal position.

If you have any questions about what I’ve discussed this month, just let me know! I’d love to have a chat with you about how Loan Market can help you.

Nick

0211 9444 24

nick.kotze@loanmarket.co.nz