Using a guarantor to buy your first home
Parental, family member or friend guarantee – this could also be used in conjunction with KiwiSaver withdrawals, gifts and savings.
This is a complex area and every bank is different on how they view it, some can be quite complex with their family springboard schemes so it pays to get advice on it from us.
Typically what happens is the bank or lender will take a mortgage over your parent’s/guarantors’ property as well as the property you are purchasing. The guarantee is usually limited to 20% (plus interest and charges in the event of default).
You would want the arrangement to be short term, e.g. 2-5 years so the loan can be refinanced and the guarantee released as soon as possible.
Usually the purchaser(s) need to prove they can service the entire debt, some of it (usually 20% of the loan) may be set up on a shorter term. Some banks require the guarantor to prove they could service some of the loan (20%) and/or be a co borrower of some of the debt.
The guarantor needs to provide some basic financial information such as a statement of position showing assets and liabilities and a credit check. They also need to confirm income. Some banks require a full application from the parents. Banks will look at the suitability of a guarantor to make sure (for example) a little old lady with only pension income and a freehold house is not being put in a compromising position!
A family member’s term deposit may also be able to be used as security for the home loan.
Every bank is different on how they work these guarantees so it pays to talk to us. Normally the guarantors will need to seek legal advice.
Please watch our video below.
For more information or to discuss your options please contact us.
The Banking Ombudsman has recently published some information about what is involved in being a guarantor. To read this information please follow this link.