Get a home loan with family and friends

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Buy with help (family and friends)

There are a few options your family and friends can use to help you into a new home such as family loans, gifts and guarantee. Find out exactly what they are below.

Overview

It’s tough buying your first home these days.

Even after you’ve crunched the numbers, prices seem to climb faster than you can save, and if you’re looking to buy on your own, it can feel even more daunting.

That’s why over half of today’s first home buyers use some type of financial support from their families to help them into the property market. This frequently takes the form of family loans, gifts or the offer to act as a guarantor.

If you’re lucky enough to have this type of financial support available, it’s important that both you and your family members get independent legal advice. This ensures everyone is fully informed of any potential risks and all your interests are safeguarded.

Let’s look at some of the ways your family may be able to help get you into a home.

Family Loans

This is exactly what it says on the tin. Your parents or family members lend you money to put towards buying a property.

As with any loan, there’s an expectation that you’ll repay it at some point. Before you accept a loan from family, have a discussion and agree on how the loan will work. Some questions for you all to consider are:

Is it an interest-free loan or will there be interest payable on it?
When is the loan due for repayment? On the sale of the property?
Do the family members lending money want input into the type of home you buy, or is it a hands-off loan?

Once you’ve agreed on how it will work, your parents or the family members providing you with the loan will need their lawyer to draft a Deed of Acknowledgment. This will set out the terms of the loan, including repayment details.

Gifts

This is similar to a family loan, but a gift does not need to be repaid and therefore is not subject to any interest. As part of your home loan application, you’ll need to provide a gifting certificate.

This document states the amount of the gift and who is providing it to you. It also confirms that there’s no expectation on you to repay the gift amount in the future.

One thing to keep in mind with a gifting scenario is that if you’re in a relationship and it later breaks down, the money gifted to you for a home purchase may be considered by the courts as ‘relationship property’.

Under the Property (Relationships) Act 1976, after a relationship of three or more years, relationship property is divided equally between partners or spouses. Unless you have a Deed of Acknowledgment indicating that your family have loaned you the equity, the assumption of the courts will be that those funds were gifted. And your parents or family members have essentially given 50% of their money to your ex. A lawyer can talk you through the potential legal consequences of gifting.

Acting as guarantor

Your parents or family members may also choose to act as a guarantor.

A guarantor offers up their assets (typically their own house) as collateral for your home loan. It’s a way for someone to help you into the property market, without having to loan or gift significant equity.

However, the risk for a guarantor is that if you can’t meet your loan repayments and terms, they’ll be on the hook for that loan instead. This could have serious implications for them, including the loss of their own property.

No one wants that outcome, so you need to be certain of your ability to meet your loan repayments. It’s also advisable to build in some protections at the beginning of the arrangement to safeguard their asset. These can include:

taking out full mortgage protection insurance to ensure the mortgage is paid even if you lose your job
considering a limit on the guarantee. The bank uses a percentage (usually 20%) of the guarantor’s asset as collateral and is therefore only able to take that percentage if you default on the loan.
paying off a portion your home loan quickly. Your repayments will be large to begin with, but you’ll build up equity and can use capital gains on the property to release your guarantor’s asset sooner.

Once again you should both get independent legal advice to make sure you’re fully aware of the risks involved in a guarantor arrangement.

Buying with friends (co-ownership)

Of course, it’s not just family who can help you into a home. Increasingly there are instances of two friends, or a group of friends, pooling resources and buying property together.

This type of purchase is known as co-ownership and means you have the same financial advantage as a couple looking to buy a first home: access to two (or more) incomes and KiwiSaver schemes, and two KiwiSaver First Home Grants (even if there are more than two of you buying a house together, the KiwiSaver First Home Grant will only pay out a maximum of $10,000 per house.).

Legally there are two ways more than one person can own a house – tenancy-in-common and a joint tenancy. Tenancy-in-common works for friends purchasing a property as each owner has a distinct share, which doesn’t need to be split equally. If one co-owner dies, their share of the property goes to their estate. A joint tenancy is more suitable for couples buying a home. Each party gets an equal stake in the property and if one half of the couple dies, their share transfers to the other half.

A property sharing agreement will need to be drawn up by your lawyers. This sets out each person’s share in the house.

A house isn’t worth damaging a friendship over, so have a conversation before you agree to buy together to set some practical guidelines around how things will work. The devil is always in the detail. Be as thorough as you can to avoid arguments down the track. And make sure this agreement between yourselves has also been legally documented.

Here are some questions for you to consider:

How long do you want to own the home for?
Will you live in the property together?
How will you divide costs related to your home such as rates, insurance, expenses, and maintenance?
When you have a home loan together, your credit record will be linked with your co-owners. You’ll also have to cover the whole mortgage if they can’t meet their obligations. Are they fiscally responsible? Are you confident they can make their repayments?
What happens when one of you wants (or needs) to sell their share of the house? Does that automatically trigger a sale, or will the other owner(s) be given the opportunity to buy them out?
If you’re currently single, how will you factor in future partners to your property agreement and living situation?
How do each of you want to structure your portion of the loan? One mortgage will be issued against the property but split into portions so each of you can structure it as you choose. This may mean for example that you pay off your part of the home loan earlier than your co-owners – but remember that you’ll still be jointly and severally liable for the loan if there is still money owed on it by any of the other co-owners.

Useful Links

KiwiSaver, First Home Grant, First Home Partner and First Home Loan

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