Getting a mortgage with over 50% deposit headache (but Approved by BNZ!)

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Forums › Finance and wealth management › Getting a mortgage with over 50% deposit headache (but Approved by BNZ!)

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1519 posts

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#2160258 13-Jan-2019 15:50

Slightly off topic, but related to family gifting.

Our investment broker suggested that rather than gifting money to a child it is better to loan money with no payback date set. That way if the child enters into a relationship that fails, the money is not part of any matrimonial settlement. It has to be paid back to the parents first.

Sounds simple, but there are bound to be some catches in this method.

quickymart

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#2160362 13-Jan-2019 16:44

I hope I don't run into something like this if the time comes for me to take out a mortgage, as I imagine my deposit will probably be a gift too.

mattwnz

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#2160384 13-Jan-2019 17:30

Does it make a difference if instead of the gift, it is a loan from a family member? I can see it being more and more common for older parents gifting money to their children in the future to reduce their assets.

mattwnz

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#2160385 13-Jan-2019 17:31

k1w1k1d:

Slightly off topic, but related to family gifting.

Our investment broker suggested that rather than gifting money to a child it is better to loan money with no payback date set. That way if the child enters into a relationship that fails, the money is not part of any matrimonial settlement. It has to be paid back to the parents first.

Sounds simple, but there are bound to be some catches in this method.

I would like to know what catches there are with this? I guess one catch is that the money may need to be repaid at some stage if the parents go into care and need money to pay for it?

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#2160407 13-Jan-2019 18:08

mattwnz:
k1w1k1d:

Slightly off topic, but related to family gifting.

Our investment broker suggested that rather than gifting money to a child it is better to loan money with no payback date set. That way if the child enters into a relationship that fails, the money is not part of any matrimonial settlement. It has to be paid back to the parents first.

Sounds simple, but there are bound to be some catches in this method.

I would like to know what catches there are with this? I guess one catch is that the money may need to be repaid at some stage if the parents go into care and need money to pay for it?

My parents do not need the money that is why they have gifted us 3 kids the money

I don't want to go into my parents finance details but they will never need the money back

John

dafman

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#2160417 13-Jan-2019 18:29

It's clear from your posts you are not trying to game the system, so I hope there is a future arrangement that will secure you the property. Best of luck.

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#2160473 13-Jan-2019 19:54

One possible scenario I can think of is if the deposit being gifted is not a gift but a loan and your parents are taking a second charge mortgage on the property.

In which case the overall LVR is over 70% (across both lenders - bank and parents) and falls foul of the BS19

I cannot see how it could have been easier before the 1 Jan 2019 changes which actually made owning an investment property easier with relaxing the minimum 35% to 30%.

(the other change affects how much of their new loans a bank can lend >80% which was raised from 10% to 15% of new loans but this applies to home owners only so not relevant in this case)

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tdgeek

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#2160477 13-Jan-2019 20:04

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One possible scenario I can think of is if the deposit being gifted is not a gift but a loan and your parents are taking a second charge mortgage on the property.

In which case the overall LVR is over 70% (across both lenders - bank and parents) and falls foul of the BS19

I cannot see how it could have been easier before the 1 Jan 2019 changes which actually made owning an investment property easier with relaxing the minimum 35% to 30%.

(the other change affects how much of their new loans a bank can lend >80% which was raised from 10% to 15% of new loans but this applies to home owners only so not relevant in this case)

Thats all I can think of, where the gift is not seen a a gift. Thus, falls under the LVR formula.

I can but hope it falls in favour of John

snnet

1410 posts

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#2160478 13-Jan-2019 20:05

mattwnz:

Does it make a difference if instead of the gift, it is a loan from a family member? I can see it being more and more common for older parents gifting money to their children in the future to reduce their assets.

It does make a difference to the equation yes. They will see a loan as a count against you in your existing liabilities so it could potentially harm your application because you would be expected to service this loan as well as the potential mortgage and any other liabilities you have (credit cards, hp, etc)

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#2160535 13-Jan-2019 20:17

mattwnz:
Does it make a difference if instead of the gift, it is a loan from a family member? I can see it being more and more common for older parents gifting money to their children in the future to reduce their assets.

@mattnz Makes a huge difference than is why gifting certificates need to be signed by both my parents and the bank keep a copy

John

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#2160679 13-Jan-2019 22:30

tdgeek:

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One possible scenario I can think of is if the deposit being gifted is not a gift but a loan and your parents are taking a second charge mortgage on the property.

In which case the overall LVR is over 70% (across both lenders - bank and parents) and falls foul of the BS19

I cannot see how it could have been easier before the 1 Jan 2019 changes which actually made owning an investment property easier with relaxing the minimum 35% to 30%.

(the other change affects how much of their new loans a bank can lend >80% which was raised from 10% to 15% of new loans but this applies to home owners only so not relevant in this case)

Thats all I can think of, where the gift is not seen a a gift. Thus, falls under the LVR formula.

I can but hope it falls in favour of John

The key is if a second mortgage is registered. If not then it's fine and the loan isn't included in LVR calculations.

It is, however, unusual for a parent to register a second mortgage for such a loan. I have seen it when family are helping out for business purposes but not typically to buy a property.

I suspect there's something missing from the puzzle and hopefully the OP will keep us all posted with developments.

eracode

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#2160701 14-Jan-2019 00:02

logo:

tdgeek:

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One possible scenario I can think of is if the deposit being gifted is not a gift but a loan and your parents are taking a second charge mortgage on the property.

In which case the overall LVR is over 70% (across both lenders - bank and parents) and falls foul of the BS19

I cannot see how it could have been easier before the 1 Jan 2019 changes which actually made owning an investment property easier with relaxing the minimum 35% to 30%.

(the other change affects how much of their new loans a bank can lend >80% which was raised from 10% to 15% of new loans but this applies to home owners only so not relevant in this case)

Thats all I can think of, where the gift is not seen a a gift. Thus, falls under the LVR formula.

I can but hope it falls in favour of John

The key is if a second mortgage is registered. If not then it's fine and the loan isn't included in LVR calculations.

It is, however, unusual for a parent to register a second mortgage for such a loan. I have seen it when family are helping out for business purposes but not typically to buy a property.

I suspect there's something missing from the puzzle and hopefully the OP will keep us all posted with developments.

This is all incorrect.

Even if a second mortgage is registered, the second mortgage does not get included in LVR calculations. The bank is only interested in its own LVR position as first mortgagee - the bank loan as a proportion of property value. And the RBNZ is interested only in the bank’s LVR - it doesn’t give a hoot about other private lenders on a property.

If the parents have made a loan, the cost of servicing the total debt (bank plus parents’ loans) will be taken into account when the bank does its debt servicing calculation. This is nothing to do with LVR calculations. When the cost of servicing the parents’ debt is included, the overall debt servicing ratio may be high enough that the bank is uncomfortable with it - and then they would decline the loan.

The reason a second mortgage is very rarely seen behind a first mortgage held by a bank, is because banks always reserve the right to approve the registration of any second mortgage behind their own mortgage. This is always covered as part of the bank’s security and loan documentation when they make the loan. A bank will generally only agree to a second mortgage if their own LVR position is extremely strong.

Even if a bank does agree to a second mortgage, it will only allow it if the second mortgagee agrees to an absolute Priority Amount (i.e. an amount up to which the bank is entitled to receive before the second mortgagee gets one cent in a mortgagee sale) which is usually the principal amount of the bank’s loan plus two years interest. A second lender can’t just waltz in and put a non-bank approved second mortgage security on a title behind a bank as first mortgagee. Well, actually they might be able to do that - but if they did it without the bank’s consent, the bank could immediately call up its loan because the borrower would be in breach of the loan agreement.

Sometimes I just sit and think. Other times I just sit.

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#2160711 14-Jan-2019 07:31

eracode:

This is all incorrect.

Even if a second mortgage is registered, the second mortgage does not get included in LVR calculations. The bank is only interested in its own LVR position as first mortgagee - the bank loan as a proportion of property value. And the RBNZ is interested only in the bank’s LVR - it doesn’t give a hoot about other private lenders on a property.

If the parents have made a loan, the cost of servicing the total debt (bank plus parents’ loans) will be taken into account when the bank does its debt servicing calculation. This is nothing to do with LVR calculations. When the cost of servicing the parents’ debt is included, the overall debt servicing ratio may be high enough that the bank is uncomfortable with it - and then they would decline the loan.

The reason a second mortgage is very rarely seen behind a first mortgage held by a bank, is because banks always reserve the right to approve the registration of any second mortgage behind their own mortgage. This is always covered as part of the bank’s security and loan documentation when they make the loan. A bank will generally only agree to a second mortgage if their own LVR position is extremely strong.

Even if a bank does agree to a second mortgage, it will only allow it if the second mortgagee agrees to an absolute Priority Amount (i.e. an amount up to which the bank is entitled to receive before the second mortgagee gets one cent in a mortgagee sale) which is usually the principal amount of the bank’s loan plus two years interest. A second lender can’t just waltz in and put a non-bank approved second mortgage security on a title behind a bank as first mortgagee. Well, actually they might be able to do that - but if they did it without the bank’s consent, the bank could immediately call up its loan because the borrower would be in breach of the loan agreement.

From BS19:

(5) Condition 2 in Appendix 1 requires a bank to include in its standard terms and
conditions for any new residential mortgage loan a requirement of the loan contract or
the mortgage terms and conditions, as applicable, that the borrower may not grant
any additional security over the property without the bank’s prior agreement.

(6) Condition 3 requires that the bank must not give such agreement unless the total of
the loan value of the bank’s existing mortgage loan and the value of the lending
against the additional security taken over the property, as a percentage of the
property value, remains at or below the lowest point of the restricted LVR ranges
specified in condition 1.

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#2160730 14-Jan-2019 08:52

OK just another update from my parents property lawyer! She is saying the bank are incorrect and she can see no limit on Gifted deposit and if I can service the debt she can't see what the fuss is about!

So I am now calling the bank to find out what they are smoking as the CEO was involved

John

eracode

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#2160735 14-Jan-2019 09:02

logo:
eracode:

This is all incorrect.

Even if a second mortgage is registered, the second mortgage does not get included in LVR calculations. The bank is only interested in its own LVR position as first mortgagee - the bank loan as a proportion of property value. And the RBNZ is interested only in the bank’s LVR - it doesn’t give a hoot about other private lenders on a property.

If the parents have made a loan, the cost of servicing the total debt (bank plus parents’ loans) will be taken into account when the bank does its debt servicing calculation. This is nothing to do with LVR calculations. When the cost of servicing the parents’ debt is included, the overall debt servicing ratio may be high enough that the bank is uncomfortable with it - and then they would decline the loan.

The reason a second mortgage is very rarely seen behind a first mortgage held by a bank, is because banks always reserve the right to approve the registration of any second mortgage behind their own mortgage. This is always covered as part of the bank’s security and loan documentation when they make the loan. A bank will generally only agree to a second mortgage if their own LVR position is extremely strong.

Even if a bank does agree to a second mortgage, it will only allow it if the second mortgagee agrees to an absolute Priority Amount (i.e. an amount up to which the bank is entitled to receive before the second mortgagee gets one cent in a mortgagee sale) which is usually the principal amount of the bank’s loan plus two years interest. A second lender can’t just waltz in and put a non-bank approved second mortgage security on a title behind a bank as first mortgagee. Well, actually they might be able to do that - but if they did it without the bank’s consent, the bank could immediately call up its loan because the borrower would be in breach of the loan agreement.

From BS19:

(5) Condition 2 in Appendix 1 requires a bank to include in its standard terms and
conditions for any new residential mortgage loan a requirement of the loan contract or
the mortgage terms and conditions, as applicable, that the borrower may not grant
any additional security over the property without the bank’s prior agreement.

(6) Condition 3 requires that the bank must not give such agreement unless the total of
the loan value of the bank’s existing mortgage loan and the value of the lending
against the additional security taken over the property, as a percentage of the
property value, remains at or below the lowest point of the restricted LVR ranges
specified in condition 1.

I don’t understand what you’re trying to say here.

Sometimes I just sit and think. Other times I just sit.

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