For many people, the chance to purchase their own home has been difficult in recent years due to the Reserve Bank and consequently lenders requirement for larger deposits. This requirement has relaxed within recent months, with some mainstream lenders reducing the level of deposit required for first home buyers, but there is still a requirement for a deposit of some description if you are purchasing your own property. Certainly, the recent changes to the First home buyer kiwisaver withdrawal have helped those who have been in the scheme for at least three years, but not everybody has access to those funds or may not have saved enough for the deposit required in order for the bank to approve a home loan. So what do you do if you want to buy a first home and have only a small deposit?
Let us look at some of the options that may be available if you are unable to come up with the preferred 20% deposit beloved by lenders.
Welcome Home Loan
The Welcome Home Loan is an option backed by Housing NZ whereby a person may purchase a property with just a 10% deposit. While this is a fantastic option for many, there are several restrictions, such as a maximum purchase price in the Eastern Bay of Plenty of $300,000, a maximum household income of $120,000 per annum and the requirement for a spotless account conduct and credit history. There are also additional requirements for the amount of paperwork to be provided in support of your loan application, and additional waiting time while the application is assessed twice -Once by the bank that the application has been sent to, then once they are happy with the calculations and nature of the deal, it is forwarded and further scrutinised by the credit department at Housing New Zealand.
If the Welcome Home Loan route doesn’t suit you, all is not lost as there are still other options available.
Gifting
Gifting is when a third party (Preferably a relative) provides a cash amount equal to the shortfall of funds between the purchasers own funds (Kiwsaver or savings) and the lenders required deposit. The required deposit under Housing NZ’s Welcome Home Loan is 10% of the purchase price or Registered valuation on the property to be purchased. (Whichever is the lower value)
i.e. If a purchase price is $280,000 and the purchaser has $20,000 from their own sources then a gift of $8,000 would need to be deposited into their account with a certificate being signed to confirm that the funds are non-repayable and non-interest bearing. There is no requirement for the person gifting funds to be otherwise involved in the loan or the property purchase in general.
Guarantor
This is where the third party offers up their own property as additional security in addition to the house being purchased. In most cases the guarantee can usually be limited to the portion of the borrowing above the banks required loan to value ratio. i.e in the same example as above the guaranteed portion would be $8,000.
Co-borrower
In situations where the bank think that the guarantor may be taking on the additional risk more than the borrowers, they may require them to become a co-borrower on the loan. This is so that they are able to monitor the management of repayments and be aware of anything being done that may affect their own borrowing potential.
It should be noted that there is a risk for those putting themselves forward as a guarantor or co-borrower, in relation to their own property being made liable in the event of non-repayment of borrowings. Nobody starts off thinking that their relative is going to default on their loan, but previous experience has shown us that people who start off with the best intentions of helping somebody out can end up in a very stressful situation. For this reason it is always advisable to seek independent legal advice ahead of entering into any agreement.
It is also a good idea for all parties involved to discuss their plans with a registered financial adviser, who can look at a range of options while making sure that there is a comfortable level of affordability for those purchasing the property while maintaining a level of security and peace of mind for all involved.
