So How Does a Family Equity Loan Work?

An option for First Home Buyers who do not have a deposit or only have a small deposit is to use a Family Equity Loan to assist with covering the 20% deposit (or balance less your deposit)

What is a Family Equity Loan?

If you have a family member who owns a property with sufficient equity available, you may be able to use their property as security for the deposit portion of the loan

How Does a Family Equity Loan Work?

A family equity loan is broken down into 2 loans;

1 – For the deposit portion of the loan (less you own savings/KiwiSaver withdrawal/Deposit subsidy) making up a total of the 20% deposit

This loan is in the name of the family member (whose property is being used as security for the deposit) and yourself. This loan is for a shorter period say 10 years (Standard loans are for a maximum of 30 years)

2- The second loan is in your name only and is for 80% for a term of 30 years

Having the first loan for a period of 10 years means that pay back this loan faster than than the second loan – this is so that you can release your family members property as soon as you have paid this back. Whilst this loan is for 10 years, generally with capital gains and repayments made across both loans you will likely be able to release you family members loan  earlier so long as you can prove (usually via valuation) that you have acquired a 20% equity in the property.

EXAMPLE

A couple wishes to purchase a property to the value of $500,000, they have $20,000 available in KiwiSaver and $10,000 in savings.

20% Deposit of $100,000 less Savings and KiwiSaver means they require an additional $70,ooo for their deposit

Loan One $70,000 – Loan is in the name of the family member and the couple – this loan is over a 10 year period (repayments based on a rate of 6.40% would cost approx $182 per week)

Loan Two $400,000 in the of the couple only – this loan is over a 30 year period (repayments based on a rate of 6.40% would cost approx. $577 per week)

Total loan repayments based on a rate of 6.40% would be approx. $ 759 per week.

Whilst loan repayments are higher than having the entire loan over 30 years – there are significant interest cost savings to be had- in this example having repaid the $70,ooo in 10 years rather than 30 saves a whopping $70,412 in interest costs (Based on a rate of 6.40%)

What Liability does My Family Member have?

In the event that you default on your mortgage payments, your family member will be liable for the repayments for the first loan of which they are party to. (but not the larger 2nd loan)

What is the Process of Applying for a Family Equity Loan?

The process is much the same as for a standard home loan, just with more parties to the loan. The family member will need to also complete a loan application and must be able to prove that their income is sufficient to meet the repayments on the loan they are party to in the event that you default.

It is strongly recommended that the family member assisting with the loan seeks independent legal advice before proceeding with the loan

Interested in learning more about Family Equity Loans?

Call us on 0800449049 for an obligation free chat!