'Mum and Dad' third-party equity will make up deposit on home

Westpac has launched a service allowing family members to help first-home buyers into properties.

The move comes ahead of restrictions that will make it tougher to get a loan for those with a low deposit.

In the next two months, banking experts expect the Reserve Bank to introduce loan-to-value ratio restrictions on banks to try to ensure the financial system is not threatened by high-risk lending practices.

A loan-to-value ratio of, say, 80-20 would mean a minimum deposit of 20 per cent of the property's value would be required before a bank could lend. Westpac said it had in the past allowed borrowers to use the equity of third parties to raise money but that its new "family springboard" service would formalise and streamline the process.

The bank will allow prospective home owners to borrow against the equity in the property of an immediate family member, or their savings, to reach the required deposit.

No cash would be required and the family's exposure can be limited to the "springboard" amount, with no liability attached to the value of the rest of the loan, the bank said.

Ian Blair, general manager of retail banking for Westpac, said the move was in response to an "evolving regulatory environment".

"For a number of years now many New Zealanders have been focused on building equity rather than investing.

"This is a way they can leverage that equity, limit their exposure to what they are comfortable with and help their children or grandchildren into home ownership," Mr Blair said.

He added that the "springboard" was not intended to circumvent any Reserve Bank rules.

"It appears that we are going to have an environment where low-equity loans are going to be more difficult to get, and this helps address that issue," he said.

"The loan is de-risked by 'Mum and Dad' putting up a portion of their equity to help get them into the house.

"That does not increase the risk in the financial system because the required equity for the loan is coming from another source," he said.

PwC partner and banking specialist Sam Shuttleworth said some banks had already adjusted their lending to align themselves with the Reserve Bank's wishes.

How it could work

*A couple want to buy a house that costs $400,000
*A minimum deposit of $80,000 is required*.
*The couple has only $40,000.
*One of the couple's parents puts up the equity in their home to enable the couple to borrow the remaining $40,000.
*Based on a loan-value-ratio requirement of 80-20

Published Courtesy of NZ Herald Online

Source: NZ Herald Online

Posted: 31 Jul 2013