Whether you’re saving your guts out in the hopes of securing a property, or watching on as the market pretty much sucks away any possibility of your kids owning their own home, the reality of buying a house in Auckland is as far off as ever for many first home buyers.

So what are your options?

  • Suck it up and move to a small town.
  • Pray your little heart out for that magical ‘bubble’ to burst and drop a family home in your lap for $500,000.
  • Or look at asking for, or offering, a little help by going guarantor.

What does guarantor mean?

A guarantor arrangement is pretty simple – rather than using cash as your deposit, the equity in someone else’s property (hello? parents) can be used instead.

With many baby boomers sitting on a plot or two of cash all tied up in bricks and mortar, doesn’t it make sense to consider paying that inheritance forward now and helping your progeny into their own little piece of Auckland paradise? Going guarantor is the way to do that without having to front up any cash – it’s all based on equity in the guarantor’s property.

If you’re the buyer, you can use a guarantor to back part of your mortgage amount, or the full thing (depending on how far your guarantor’s generosity (and sensibility) stretches! The bank will have a say in that too…

For example that might mean fronting up with $80k savings and KiwiSaver as a deposit, and adding another $80k that has been guarantored – that gives you $160k as your 20% deposit… for an $800,000 home.

Each and every application is different of course, and there will be a couple more hoops to jump through than your average home purchase. The bank will make sure the kids have a stable enough income to hold up their end of the bargain, and will make sure the guarantee can be covered by the parents too. This little vid talks you through it.

So, what’s it going to mean to me in money terms?

Naturally parents want to know what the risks are and be comfortable about taking them on. The top questions mum and dad want answers to seem to be ‘How much money are we up for?’, ‘What happens if it all goes belly up?’, and ‘What if we want to move house?’

Fair enough. They do face some risk, but there are a handful of things we suggest as mortgage brokers to mitigate that, including:

  • Setting up the loan to repay the guarantors’ portion in 5-7 years – at that point the guarantee is then released. In the current market, capital gain has made this achievable within two years but either way it puts a line in the sand that parents can see, and kids can afford.
  • A life insurance package is put in place too for the purchasers, which includes income protection. This isn’t compulsory, but makes damn good sense because it ensures the loan keeps getting paid even if the kids have to stop working due to illness or injury.
  • The guarantee can also be limited, which puts a ceiling on the parent’s liability.

So all up, there are a number of checks and balances here, and the banks tend to play it a lot more conservatively than you might think – for the sake of themselves and ma and pa, rather than the kids!

At present, going guarantor is one of the only ways first home buyers are getting into the Auckland market without a $180K combined income! That’s how harsh the reality is.

So if you’re looking at buying a house in Auckland, or you want to consider the possibility of helping your kids into a home, do get in touch and ask me all about going guarantor – we can help make the process simple and very satisfying for all parties.

Call me on 0508 462 489 or drop me an email.

 

About Campbell Hastie

Cam is one half of Auckland based mortgage brokers, The Go 2 Guys.

He makes a living by sharing what he knows about mortgages with people, arranging mortgages for people and then insuring people.

He doesn’t claim to know everything about mortgages himself which is why he teamed up with David Mercer — hence the ‘2’ in Go 2 Guys.

He writes posts regularly on his blog and has been told he has an ability to share his knowledge in a simple and sometimes memorable way.

Feel free to comment and ask any questions. Contact Campbell Hastie m: 027 697 7789.

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