A significant problem we see with first time buyers is that the pace at which house prices have risen in recent years, has totally outstripped their ability to save a house deposit.

With a 15% increase in each of the last two years, a $500,000 house has turned into a $660,000 house, and I don’t know too many people who can save at that rate – it’s more or less impossible.

Thank god many first timers got into KiwiSaver a few years back and can benefit from the enforced savings habit it creates. In terms of getting into a house, most of them would be screwed without it.

What if the ‘traditional’ house deposit is off the cards for you? Is there a different approach?

Time to get creative?

The idea of tapping mum and dad to be guarantors is becoming more than popular, quite necessary in fact! This works because parents allow enough equity in their home to act as a 20% deposit for a place for the kids – the kids borrow the lot, less any cash input they make to the deposit.

One of the problems with a parental guarantee is that the bank will put them through an affordability test even though they’re not going to be primarily responsible for paying the mortgage. Basically, the bank wants to know that the parents can cover the 20% portion of the mortgage, if for some reason the kids don’t, won’t or can’t. This means that from the bank’s perspective, the best guarantors are usually still working. So, what if your folks are retired and on the pension?

Go halves?

Why don’t you buy a percentage (say half) of Mum and Dad’s house? That’d free up some capital for them and they could move to the beach up north, maybe buy something outright, and live happily ever after. It releases some of their hard-earned capital without letting go of the asset completely. And it’d give you a foothold into the market, often in a suburb or school zone you’d otherwise be priced out of.

There are several key implications:
  • You’re borrowing less (half a house rather than a whole house) so passing the bank’s affordability test is easier for you.
  • A smaller loan also means a smaller guarantee for your parents, so it’ll mean passing the affordability test is easier for them too.
  • A ‘tenants in common’ approach to ownership is preferred (in my opinion) rather than the usual ‘joint tenancy’ situation, because it allows you to adjust the share each party has in the house. Importantly it allows you to match the percentage you own with the financial horsepower you’ve got.
  • Parents still have a stake in the property and benefit from future capital gain, as do you.
  • You can still use KiwiSaver money in this scenario as it’ll be your first house.
  • You need a property sharing agreement to cover off such things as who pays what, the parent’s right to occupy the property too and what happens if the parties die, get divorced or just want out?

Probably the hardest part about this scenario is the honest and open conversation that has to happen between parents, children and any siblings! And it pays to have that conversation sooner rather than later – decisions like this take time, particularly when it may mean your parents are moving away from their family home. Plus, your siblings might be signing your parents up right this moment, so swallow your pride and get the conversation started!

Want some pointers on how to make it work for your situation – ask us. We’re happy to give free unbiased advice any time.

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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