How To Buy A First Home With Next To No Deposit
Your guide to gifted funds, family guarantee loans and second mortgages
Until a month ago when the Reserve Bank put the bite back in to speed limits the banks were generally pretty happy to lend to people with good incomes and small deposits. Now they’ve been forced to pull the drawbridge up and if you’re buying in Auckland you’re up against it again.
Best spot to be in. These can be used to make up a 10% deposit for a Welcome home loan or to get you across the line with 20% down. The bank will ask your generous benefactor to sign a statutory declaration stating that they are gifted funds and don’t need to be paid back.
If they do need to be paid back? This can work as well but either the repayments will need to be included in affordability calculations or if that doesn’t work there’ll be some more paperwork – a deed of acknowledgement of debt confirming no repayments are due until the property is sold or refinanced.
How Family Guarantee Loans Can Help
Family guarantee loans can help you get around the speed limits without any cash changing hands. The way they usually work is Mum and Dad will put up a property as additional security for the loan. They will need to have equity in the property but don’t need to own it outright. This can mean they are liable if the bank needs to recover the loan though so there is additional risk involved and the bank will make them get independent legal advice.
It’s important that family guarantee loans are structured correctly so the guarantor’s liability is limited to the minimum required and there is an exit strategy in place to release the guarantee.
How to Exit Family Guarantees Early
Ideally you will see a capital gain through either market appreciation or a quick renovation which will get you to the 20% mark. If that doesn’t look to be on the cards though you can refinance to a bank after six months – there are no restrictions on refinancing above 80% of property value so long as the loan amount doesn’t increase. You will be faced with additional legal and valuation costs however, and the rate won’t be as sharp as on a loan with 20% equity.