Bay Harbour: September 07, 2016

Wednesday September 7 2016
BAY HARBOUR
PAGE 19
Helping your
children into
their first home
ADVERTORIAL
My parents bought their first house in
Christchurch on a quarter acre section in
the 1970s and paid $12,000. At that time
an average salary was around $6000 per
annum. Today the GV of that same house
is $650,000 and no doubt the market value
is even higher with an average salary sitting
around $60,000 to $65,000 per annum. It
doesn’t take a mathematician to calculate
today’s house values are often 10 times the
average salary, whereas 40 years ago, they
were, as was the case for my parents, only
twice the average salary.
The media tells us almost daily that for
many young people looking to purchase
a first home, the options are increasingly
out of reach. The minimum 20% deposit
required by lenders and increasing house
values mean that for the same house my
parents bought as first home owners in the
1970s, today you would need a $130,000
deposit.
My parents were fortunate enough to have
a grandparent loan what they needed
to purchase their first home. If you are
considering assisting your children or
grandchildren with their first home
purchase, then there are a number of
options available.
1. Loan or Gift
The most obvious option to assist your child
into a first home is by assisting with the
deposit either by loaning the money to them
or by gifting the money.
In the past banks have required that such
money is gifted; however, it is increasingly
more common for banks to not make any
issue on how the funds are obtained by the
child. Other than reasons such as the bank
requiring a gift of the deposit, or parents
wishing to reduce the value of their assets, it
would be more desirable to loan the deposit
to the child. This ensures that the funds
can always be recalled. For example if the
child’s relationship ends, the funds will be
less likely to form part of the “relationship
property” for division.
Any funds lent to your children should be
recorded in a loan agreement or deed to
ensure that they are not later treated as a
gift.
2. Guarantee a bank loan
Banks are generally happy to lend money
if they have adequate security (mortgages
over properties). If properties can be
lumped together to increase the value of
the bank’s security, then the amount of
borrowing may also be able to be increased.
For example, if Mum and Dad own their
family home outright valued at $600,000
and also own a rental property valued at
$400,000 which is subject to a $200,000
loan, then their equity (over which the bank
will have security by way of mortgages) is
around $800,000 ($600,000 + $400,000
- $200,000 = $800,000). Their son wants
to purchase his first home for $350,000.
By providing guarantees to the bank for
their son’s loan of $350,000, the bank may
agree to lending the full $350,000, on the
basis that the bank still has $450,000 equity
($800,000 - $350,000).
An unlimited guarantee is a real no-no. It
is better to try to get the bank to limit the
guarantee to the value of the original loan
of $350,000. An unlimited guarantee would
secure the son’s other obligations to the
bank such as credit cards and personal
loans. It could even secure the son’s future
obligations which Mum and Dad may not
even be aware of. Where an unlimited
guarantee is given by Mum and Dad, they
should make sure that the guarantee is
terminated as soon as there is enough
equity in the son’s house so that the son can
refinance directly with the bank.
3. Extending own mortgage to provide
deposit
A better option might be for Mum and Dad
to extend their mortgage for the required
10 or 20% deposit needed by their son, and
then lend that to their son (as outlined in 1
above). A bank would still need to accept
this source of funding when approving the
son’s application for finance. But it would
give Mum and Dad the certainty of knowing
the exact amount owing to the bank.
4. Joint ownership
Something that I have not seen too often,
but which may work well in the right
circumstances is joint ownership between
you and your child. For example, Mum and
Dad provide the deposit (say 20% - $70,000
of a $350,000 house) and then own a 20%
share in the new home. The son takes out
a loan for the remainder of $280,000 and
owns the remaining 80% of the property.
Again the bank will require a guarantee
from Mum and Dad as they will be owners
of the property. However, they gain the
benefit of capital gain in the property. With
this type of joint ownership arrangement, it
is always a good idea to have a “Property
Sharing Agreement” between Mum, Dad and
son. Such agreement would deal with the
sharing of outgoings and income (if any),
restrictions on further borrowing, house
maintenance requirements, relationship
separations, and termination of the
arrangement.
These options are not exhaustive, and the
individual arrangement which will work
for you and your child will depend on your
particular circumstances. I would be happy
to talk to you about the possibilities.
Next month’s article will stay with this topic
on home affordability for first home buyers
and look at options for purchasing using
your kiwisaver funds, a homestart grant, and
a welcome home loan.
Written by Prue Miller
Layburn Hodgins
Our Goal: To make it easier
for you to achieve yours!
Do you live in the Lyttelton
Harbour Bays?
Prue is so passionate about the community that
for every completed house and land sale or
purchase on behalf of a Bay resident before the
end of 2016, Layburn Hodgins will donate $100
to either the Jetty Restoration or one of the three
primary schools in the Bay – client’s choice!! We
aim to help the community achieve goals too!
We can even visit you at your home if you don’t
travel to Christchurch regularly.
Meet Prue Miller
Governors Bay local, parent at Governors
Bay School and experienced property
and commercial lawyer.
Prue’s specialist areas include
conveyancing, trusts, wills, contracts
including building agreements,
contractors agreements, terms of trade,
supply agreements and consumer
contracts.
Please call Prue Miller - your
local lawyer for all your
legal needs.
Phone: 03 366 2332 | Email: layburn@layburn.co.nz
Visit: Level 1, 205 Durham Street South, Christchurch
www.layburn.co.nz