7 ways parents can help children buy their first home

18th Oct by Robbie Crawford

7 ways parents can help children buy their first home

7 ways parents can help children buy their first home

As the housing market remains hot and the Reserve Bank dishes out stricter lending rules to New Zealand’s major banks, many first-time home buyers, often younger people, are finding it difficult to get their first mortgage. For many of you, this will be affecting your nearest and dearest, and it’s you, as family, they’re looking to for assistance. Lifetime’s Financial Adviser Robbie Crawford has a few tips (or mortgage hacks) for those hoping to give their loved ones a helping hand onto the property market.

With most banks requiring a 20 percent deposit to obtain a home loan, raising the initial capital can be the most difficult part for many first-time buyers, here’s how you can help.

1. Using your house as equity

You can help raise a deposit by using the family home or another property you own to borrow against to supplement the shortfall in the required deposit.

Generally in this case, parents borrow funds in their own name and basically ‘gift’ this to the children. While the banks will want to see this as a gift, you may wish to have legal documentation to protect all parties concerned. The advantage of this is that the parents will have no further liability toward the children’s loan.

2. Guarantee a loan

Another option is for the parents to provide supporting security. Trading banks generally operate on an 80-20 rule for their loan to value ratios whereby 80 percent of the loan is secured against the children’s property and 20 percent against the parents’ property. With this, the child will be responsible for 100 percent of the loan servicing, with the parent as guarantor for the portion remaining of the 20 percent loan. Some banks will require parents to be co-borrowers for this smaller loan. It is encouraged to accelerate repayments to clear the loan and the parents’ liability as quickly as possible.

3. Use the Welcome Home Loan

The Welcome Home Loan, which is underwritten by Housing New Zealand, is a great option for those who decide it’s better to get on the property ladder now,  before the rapidly expanding market makes it too difficult to buy in the future.

These loans only require a deposit of 10 percent. 

If your child has a reasonable income, which can cover mortgage repayments but little savings, you can offer this lower deposit amount as your cash gift. 

In addition to your cash gift, Housing New Zealand guarantees a portion of the lending to the trading bank the mortgage is with.

However, the downside is that the mortgage can be subject to higher interest rates and there could be the condition of paying extra on the loan by either this higher interest rate or through a low equity margin (LEM). If your child is earning $85k or less, or a combined wage with their partner up to a maximum of $130k they are eligible for this type of home loan. House price caps are part of the criteria – in Christchurch and Wellington city, the cap is $500k for an existing property and in Auckland the price cap is $600k.

...first-home buyers who invest eight percent are often pleasantly surprised when they come to withdraw the money for their first home...

4. Offer a cash gift

If you’re in a secure financial position, gifting cash to kick-start your family members’ home ownership can be the hassle-free option.

The advantage of parents forwarding cash for a deposit is that the first-home buyers can choose to deal with whichever bank or mortgage provider that best suits their needs and taking advantage of the best interest rates available at the time.

5. Up the ante on KiwiSaver

The power of KiwiSaver savings is often overlooked. When your child reaches 18 and/or get into their first job, advise them to contribute the maximum eight percent into a chosen Kiwisaver fund.  As it is money they have never had, they won’t even notice when it is withdrawn every month.

Committing to maximum contributions makes a big difference to the speed in which the money builds up, and first-home buyers who invest eight percent are often pleasantly surprised when they come to withdraw the money for their first home, which they can do after three years of continuous investment.

Don’t forget there are other perks of contributing to KiwiSaver too – namely that individual homebuyers that have been in KiwiSaver for three, four or five years respectively can receive a one-off HomeStart grant of $3,000, $4,000 or $5,000.

For turnkey properties and new builds, the HomeStart grant is $2,000 for each year of KiwiSaver contribution. So for three, four and five years of contribution, members can respectively get $6,000, $8,000 or $10,000. However, income caps do apply to HomeStart grants.

6. Focus on what they can afford

The banks do prefer buyers to have a 10 to 20 percent deposit for most owner-occupied properties, but there are other options if your child simply can’t raise that capital.

Help them do their research into turnkey properties, sometimes offered as land and house packages, whereby buyers purchase properties off design plans. Deposits required tend to be at the lower end for these and you’ll also find that Welcome Home Loan house price caps are higher for new properties too.

The banks do prefer buyers to have a 10 to 20 percent deposit for most owner-occupied properties, but there are other options if your child simply can’t raise that capital.

7. Teach them saving habits

If your family member isn’t quite at the buying stage, but will be in a few years, it’s worth helping them prepare a manageable saving plan with an accompanying budget now. Learning good habits as early as possible is invaluable for building wealth through property or other means later.

If the saving is on track, all the other mortgage hacks will fall into place more easily and planning for the future is easier.

There are many ways in which an adviser can help people of any age develop a budget. Budgets help you consolidate debt, track spending habits, identify areas in which you can make savings or spend less, and all you to ultimately set goals to build the lifestyle you want and stop wondering: ‘Where did my money go?’.

Lifetime advises people to seek personalised legal and financial advice before entering into any such agreements as mentioned in this article to ensure they understand any potential risks.

Robbie Crawford is a Financial Adviser with Lifetime – he specialises in mortgage brokering and risk insurance.

ARTICLE BY Robbie Crawford - GET IN TOUCH