Here at Southern Cross Partners we’ve become aware that New Zealand parents are finding it harder than ever to help their children buy homes because certain mainstream bank lending requirements mean that asset wealth is no longer good enough for mainstream financiers.
It has steadily become harder and harder for parents to use their assets to guarantee the next generation’s transition into property via main trading banks.
Yes, it is still possible but not easy. 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.
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.
One way some banks are approaching the problem is to require that the parents and the children enter the mortgage as co-borrowers. The parents put up the security, and the kids make the repayments.
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?
Another option is to ask the parents to raise the deposit by borrowing against their property.
For example, a daughter and her husband may be buying a house for $1 million, but they have only saved $50,000. Her parents could borrow the $150,000 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.
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.”
The lack of ‘wealth transfer products’ and the failure of banks to consider applications on a more personal, case-by-case basis (even when the deal makes sense from a commercial decision perspective), is contributing to a boom for non-bank lenders.
At Southern Cross Partners our lending has grown by more than 20 per cent year-on-year in part because of the one-size-fits-all way many mainstream banks are assessing lending deals, including the provision for wealth transfer type loan structures.
KPMG’s Financial Institutions Performance Survey in New Zealand – confirms that the non-banking sector had seen significant growth as high as the mid-teens, starting about 18 months ago.
“For the first time ever, we see mainstream banks aren’t sucking up most of the mortgage applications. People who have never had a ‘no’ from the bank in their lives are suddenly finding themselves declined,” the report said.
The report goes on to say that reasons for the conservative approach by mainstream banks was precipitated by lending restrictions in Australia that make it difficult for parent banks to lend to their New Zealand banks, and much tighter scrutiny of mortgage applications.
“We have an ageing population and a climate that makes it increasingly difficult to facilitate inter-generational wealth transfer. Older people who have retired and have no income from a job as such, but who are asset rich, nevertheless are being told ‘no’,” the KPMG report said.
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