4 Ways Parents Can Help Children Buy Their First Home

25 Oct 4 Ways Parents Can Help Children Buy Their First Home

Most first home buyers know just how hard it is to buy a first home these days. With most lenders generally requiring a 20 percent deposit, finding the necessary amount is one of the biggest hurdles facing first home buyers. If you’re struggling to get onto the property ladder but your parents are willing to help, you may be able to get into your own home much sooner. Here are 4 ways parents can help their children buy their first home.

1. A cash gift

The simplest way for parents to help their children to buy a first home is with a cash gift. This could mean contributing all of the deposit required or simply topping up their child’s savings to reach a 20 percent deposit. It’s an ideal option for those in a secure financial position, who have the available cash to gift their child without requiring them to repay it.

• Less risk for parents as they are not liable for any part of the mortgage
• More independence for the first home buyer who is not limited in their choice of lender or lending options
• A favourable option for lenders as it means the first home buyer isn’t liable for the repayment of a loan

2. An interest-free family loan

For parents who have the means to help their children with cash for a deposit, but require the money to be repaid at a later stage, an interest-free family loan could be a solution. Similar to a cash gift, parents would lend their child the money required for all or some of the deposit, and the debt is either repaid in instalments, or in a lump sum when the property is sold. The conditions of the loan are set out in a legal document called a “Deed of Acknowledgement of Debt”.

• Parents are not liable for any part of their child’s mortgage and they are legally protected so they can be repaid
• First home buyers are not limited in their choice of lender and can buy a home independently
• Lenders may reduce the amount they are prepared to lend, factoring in the amount of the loan that has to be repaid to parents

3. Acting as a guarantor

Another way for parents to help their children buy a first home is to act as a guarantor. By using their own home as security, parents would guarantee that the mortgage repayments will be met, and that they are liable for repayment of the loan should their child default. When calculating how much they are prepared to lend, the lender will factor in the amount being guaranteed. This type of assistance is slightly more risky, so it’s important parents are clear about the impact this could have on their own financial situation.

• Under the Responsible Lending Act, lenders are required to ensure the borrower and guarantor can afford to repay the loan without suffering substantial hardship
• The parent’s property must have sufficient home equity to cover the amount being guaranteed
• Banks will not lend above 80 percent of the parent’s property and any existing mortgages on the property will be factored in by the lender
• Parents will need to meet servicing standards on their own debt as well as the debt their child takes on
• For parents nearing retirement age, this may not be a suitable option

4. Buying a home with your children

Joint borrowing and buying a home together may be a solution for parents who want to help their children buy a first home but are unable to assist with cash for a deposit. As joint borrowers, both parents and children would contribute towards the deposit and both would be responsible for repaying the loan. This is ideal for parents who are still earning a decent income and still have many years before retirement, and they would benefit from their share of capital gains when the property is eventually sold.

• First home buyers may still be able to use their KiwiSaver Withdrawal funds for their deposit provided they meet all other eligibility criteria
• Lenders may view this arrangement as an investment which would mean a higher deposit would be required
• Risky for parents who are nearing retirement
• Important to cover any risk with legal documentation outlining specifics of the arrangement

Deposit options for first home buyers

If you’re looking to buy your first home, it’s helpful to know what deposit options are available to you as a first home buyer. From Government’s First Home Loan and First Home Grant to KiwiSaver Withdrawal and help from family, don’t be held back from buying a first home just because you haven’t quite saved enough. Get expert advice from a mortgage professional to determine which first home buyer assistance is right for you. Contact a Max Mortgages Adviser today.

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