Equity left in property - what does that mean?

[ladeda]

So I have been offered the deal of a lifetime - equity left in a property by friends because I don't quite have 10% deposit. How does that work? Property is $350k and I have $30k. Private sale. Call to mortgage broker suggests a 10% deposit can be done. I don't have family money so this is a last chance to own property as I am in mid-fifties. First time home buyer so it is scary to navigate through the quagmire of mortgages, banks and legal jargon.

Any help appreciated.

[Bobsyouruncle]

The only way to make the equity work for you is to get them to sell you the property at retail. Let's say that might be 450k. They then leave in the 100k as an unsecured second mortgage or as a gift. Providing the bank gets their valuation at 450k this would work. You then put in your 30 and borrow the 320k balance.

[sidinz]

Anecdotal evidence from brokers is that banks don't like this, so be prepared for resistance if you structure things that way.

But basically, they would be lending you the shortfall ($5K) to get your deposit together. Usually interest is charged, so it's like having a mini-mortgage to your friends, alongside the mortgage to the bank.

It would probably fly better if they lent you the money privately and didn't link it to the property or mortgage when talking to the bank.

Do you have Kiwisaver?

[Nick G]

10% is 35k so only 5k short. I assume it's for your own home so you need 10% and not the 40% bob is suggesting.

Your bank will likely insist on a 20 or 25 year P&I loan. I suggest you sit down with your broker and work out your repayments, insurance, rates and other costs involved in owning a home. Owning a home is generally a good thing however you will be paying it off until you are well into your seventies, assuming you pay at the bank's schedule. It is worth getting some good advice and also speaking with an insurance broker about health and life cover. I can recommend a good independent financial advisor if you want someone to help your u evaluate why this purchase means for your life situation.

[Beano]

Calculating the cost of ownership (interest ,rates ,insurance ,maintenance etc) will it be less than renting ?

[ladeda]

It will be slightly less than renting but moving from a modern 4bdrm double glazed two car garage to a fibrolite box with a carport. I suppose that is the sacrifice of home ownership.

With the equity left in the house will we become joint owners with our friends? Or do they sell the house for $300k and we have a private arrangement for the $50k? Second mortgage in a couple of years? Or do they gift me part of the deposit and I then pay that back? (Feels awkward lending money from friends in that way). I haven't talked the details with them as I thought I would research it first and then see what is the best way to do it. They want to sell the house, I want to buy the house, they want to help me to do that by saying "We can leave some money in..."

[ladeda]

Paying rent forever (and into retirement) seems as daunting as a 25yr mortgage...and the rent increases every year.

[Bobsyouruncle]

Well that is now different to your first post. Leaving money in us not giving you equity it is just giving you a loan. You need to know what the valuation on the property is, exactly what the sellers are willing to do for you, then talk to a good broker.

[ladeda]

That highlights my ignorance of the terms used and how I am interpreting the offer. I'm really not sure what I mean or what exactly they are offering. I'm not sure that THEY know what they are offering?

[Nick G]

Ah, it is a second mortgage, usually at a higher interest rate, that you pay back first in that case. Not so bad as long as it's affordable for you and viable for them.

[Bobsyouruncle]

So get it clear first then talk to a broker. The banks currently will not allow a second mortgage secured on the property so my original idea, which i have done previously is the best way, if the sellers were ok with it and they were selling to you below valuation. If not then they would need to have a private loan with you, effectively unsecured and you would pay your mortgage and their loan. I am not sure whether the banks will wear that hence you need a broker to advise.

[Perry]

In addition to the resistance that Sidnz mentioned, there's more:

Banks tighten home lending for older borrowers

It is harder to qualify for a home loan than it was a year ago, as banks tighten their lending criteria. Banks are being more cautious about issuing home loans that would leave borrowers making repayments after the age of 65.

[ladeda]

Hopefully someone will still lend to an old girl. Talking to a broker so will let you know how I get on.