NOTICE: Despite forecasts that the housing market will cool down in the coming months, the numbers keep climbing.
Among the latest disclosures was the price hike in Wellington, first-time homebuyers now need $ 171,000 for a deposit. This is $ 43,000 more than a year ago.
It’s only slightly better elsewhere, with filing requirements across the country rising from $ 28,000 to $ 153,000. These numbers were calculated using the 20% deposit required for the median property value. (It’s worth adding that many first-time homebuyers can still buy with a deposit as low as 10 percent). And it is set to get worse, with the Reserve Bank forecasting house prices to rise 22% year-on-year by the middle of the year.
In large part, this is because people are taking advantage of record interest rates to enter a market with low listings.
But while the cost of servicing a mortgage has never been lower, deposit requirements have never been higher, and this is where the big issue for many lies.
So where do first-time homebuyers (mainly young people) find this kind of money?
Going into lockdown last year with $ 130,000 in the bank and an eye on a house, all would have looked good. But in a matter of months, for many, the dream was ripped off.
In addition to deposit requirements, banks are very wary of borrowers’ ability to service loans, testing their ability to pay at rates of around 7 percent. It should also be noted that once a buyer gets a 20% deposit, the rates can be 0.50% lower and there are potential money back offers from the bank. Both could save around $ 15,000 in the first three years of a mortgage.
With the amount of loans and deposits required, it is undoubtedly much more difficult for our young adults to demonstrate sufficient income to repay the loan.
There is only one bank left that does not require a deposit or even often an interest rate: Mom and Dad’s Bank.
This is a common way for first-time homebuyers to access the housing ladder, with estimates showing that 50-70% of mortgage applications go to first-time homebuyers using this source.
This seems to come mainly in the form of deposit assistance, and it can be done in several ways: a direct donation or an anticipated inheritance; a cash loan (with or without interest) repaid in regular installments, and in addition to the regular service of the commercial bank loan; a cash loan to be repaid on the sale of the property – either in the form of equity which increases as the value of the property increases, or simply in the form of face value; or mom and dad borrowing on their own property (and getting into debt again).
It all depends on the ability of mom and dad’s bank to either pay the money in the first place or dispense with the interest or investment value that would otherwise accumulate as retirement approaches or at the entrance to it.
Remember, the mom and dad bank we are talking about might be the bank of young baby boomers who, unless they get good financial advice and start investing from a young age. , may rely on savings and home equity for a comfortable retirement (downsizing or taking out a reverse mortgage), and so may find it difficult to help.
It can put a lot of pressure on them. For many, 13-year-old KiwiSaver’s near-compulsion came too late to add anything important to their nest egg.
The pressure is no less for young moms and dads, perhaps in their 40s and 50s, whose children are considering buying their first home. Their mother and father’s bank may have been strained to support them throughout their college or higher education, where the student loan did not cover living expenses, and now they are looking for a home with a student loan yet to be repaid and are struggling – unless they receive parental assistance.
So how do moms and dads help them while making sure they maintain a financial future on their own?
The answer would be “very careful” because even offering a simple guarantee for a loan carries a certain level of risk.
The options I described earlier are all achievable.
The idea of equity has the advantage of using the market to increase the size of the investment. Your mom and dad bank takes a stake in the house and lets price inflation do the rest. This way the kids climb the ladder, but as they climb it selling the small first house for a bigger second, they’ll be in a better position (and hopefully sooner). to repay a larger return in time for it. retirement madness!
Whichever option you choose, it is essential that moms and dads and kids enter the arrangement seamlessly and with their eyes open.
Having something in writing also helps make sure things are clear to everyone. As any good lawyer will tell you, property arrangements, even involving family, should be in writing.
To that I would add that moms and dads need to squeeze out all emotion and critically examine how the arrangement will affect them and their ability to live a comfortable retirement. The search for independent financial advice never goes astray.
The question that was asked to me recently during a review with my financial advisor was, where does mom and dad’s bank end? There is no right or wrong answer – you just need to have a plan that works for you and your family.
Katrina Shanks is the Managing Director of Financial Advice NZ.