Bank of mum and dad shuts doors

It’s becoming harder to tap into the “bank of mum and dad”.

Lenders and mortgage brokers said bank lending requirements were making it tougher for first-home buyers to use their parents’ support to get a home loan.

Over recent years, many buyers have been able to get a foot on the property ladder by using their parents’ properties as security. In March it was estimated that half of all buyers had their parents’ help, and up to 90 per cent in some parts of Auckland.

“It is still possible but not easy because, back in the day, banks could asset lend in the comfort that they would be repaid. Asset-rich parents were not assessed on their ability to repay the loan – the asset was good enough,” peer-to-peer mortgage lender Southern Cross Partners chief executive Luke Jackson said.

“However, in the current environment, the banks – or at least their auto-decisioning software – wants to know that the parents, or whoever else is repaying the loan, have the income to service the mortgage if something goes wrong. Of course, when people are retired or close to retiring, they’re asset-rich but income-poor,” Jackson said

He said some banks were asking borrowers and their parents to enter the mortgage as co-borrowers.

“The problem with co-borrowing is that it is ambiguous as to who owns what. For example, how does the co-borrowing and property co-ownership arrangement work, what are the entitlements of each party on the sale of the property and what happens if there’s a falling out?”

Jackson said another option was to ask the parents to raise the deposit by borrowing against their property.

“The result is that we have a couple who have worked hard all their lives – and are getting to a point where they can consider retiring on what they have built – when suddenly they find themselves in debt again for a significant amount of money. The children will pay – most of the time – but there is still the risk factor because life happens,” Jackson said.

“Previously, all parents needed to do was provide a guarantee against their assets, even for a second sibling, and the debt would still be all in the children’s names.”

Jackson said the lack of “wealth transfer products” and the failure of banks to consider applications on a more personal, case-by-case basis were contributing to a boom for non-bank lenders.

Broker Glen Mcleod, of Edge Mortgages, said he did not encourage parents to guarantee their kids’ lending at all.

“They are jointly and severally liable for the debt and co-borrowing is worse. We do encourage the parents borrowing separately and using a deed of acknowledgement of debt. Yes, they will have a loan to pay down but safer than being all in. 

“The banks are making it harder and part of the problem we are seeing with co-borrowing is that they are not able to service the total lending themselves. Mainly because they have retired.”

Jackson said his loan book had grown 20 per cent year-on-year partly because of the mainstream banks’ reluctance to lend. 

Claire Matthews, a banking specialist from Massey University, said it was not good lending practice to lend against assets.

“Good lending is always done against income, with the assets providing a back-up repayment source if the income fails. 

“What previously happened was that the children had the income to make the repayments but not the assets to provide the back-up, which is where the parents stepped in and why their income was not relevant,” she said.

“Today, with the size of loans required in many parts of the country, it is likely to be more challenging for the children to demonstrate sufficient income to service the loan so the parents are now required to help with the repayments as well as the back-up assets.”

She said parents’ involvement in their children’s purchases had always carried some level of risk, even if they only offered security for a deal.

“There was always a risk the children would encounter life challenges that led to them not being able to make the repayments.  Actually borrowing the money in their own name, simply makes the risk more transparent to the parents.

Source: Stuff

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