This is a creatvie no (or low) deposit, deposit optionbank of mum and dad

With the requirement for 20% cash deposits knocking a lot of people out of the market it’s time to get a bit creative if you want to get into your first house.  Getting a guarantor on side is one such  option that has actually been around for a long time.

How does it work? And could it work for you?

The arrangement itself is quite simple and the key to understanding it is to realise that rather than using cash as your deposit, the equity in someone else’s property (often parents) is used instead. In this way it’s possible to buy without having saved much cash, if any. And it’s a great way for parents to help children get on the property ladder without having to write out a cheque.

Are there any risks?

The essence of being a guarantor is that you’re making a promise to pay the mortgage if the borrower doesn’t, can’t or for whatever reason, won’t. Guarantors have to back up their promise by giving the bank a hook into some form of security which is normally another property but could be something else, like a term deposit.  If payment isn’t made and there are no other options then houses get sold. Simple as that.

A relationship breakdown, job loss or being too crook to work are the main reasons why guarantors might get a knock at the door.

Parents need to go into this with open eyes but there are several things we do to reduce the risks as much as we can including:

a) limit the extent of the guarantee. That puts a line in the sand as to how far the bank’s hook can go into your folk’s house. Normally set to 20%.

b) put a full and proper mortgage protection insurance package in place so the bills keep getting paid even if a health event stops you going to work

c) paying a portion of the  mortgage over a short term, usually 5 years. The idea is that you build equity fast and can release your parent’s guarantee in a known time frame. Doing this means your loan payments will be quite chunky to start with but think of it like saving a deposit after you’ve got the house rather than the other, more usual way around! With the help of capital gain its sometimes possible to release parents within 5 years.

d) parents will be required to take independent legal advice to make sure they have a frank understanding of the risks

e) don’t forget the bank actually has a lot at stake here (who’s putting in the most money?) so it will be assessing things a little harder than usual. Passing their assessment should give your folks comfort that someone else has at least run you through the mill too. Clearly, parents need to satisfy themselves too.

Got an example?

Jenna & Jamie

Jenna and Jamie bought a place in Glen Eden for $450,000 ( That’s them in the picture, mid 2013)

They had some cash from Kiwisaver and their own savings so needed a mortgage of $435,000 or 97% of the purchase price.

Jenna’s parents were happy to come on board as guarantors and put up a guarantee over their own home to make up the difference from what Jenna and Jamie had and the 20% deposit cut off.

The loan itself was split into a small part and a big part. The small loan is set up to be repaid over a 5 year period so the monthly payments on that are quite high. However they only pay interest on the big loan for the time being.

Over the next couple of years we hope capital gain will lift the value of Jenna and Jamie’s house at which point they’ll be about halfway through their ‘small’ loan too. If there’s enough equity the idea will be to release the guarantee given by Jenna’s parents and both parties can then go their separate ways.

Lending Lowdown Guarantors

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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