Lenders curb access to bank of mum and dad
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 firsthome buyers to use their parents’ support to get a home loan.
In 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,’’ said Luke Jackson, the chief executive of peer-to-peer mortgage lender Southern Cross Partners.
‘‘Asset-rich parents were not assessed on their ability to repay the loan . . . However, in the current environment, the banks – or at least their auto-decisioning software – want to know that the parents, or whoever else is repaying the loan, have the income to service the mortgage if something goes wrong.’’
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.’’
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 ... 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.’’
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 coborrowing is worse,’’ he said. ‘‘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 [this is] safer than being all in.
‘‘The banks are making it harder and part of the problem we are seeing with coborrowing 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.
‘‘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 backup assets.’’
She said parents’ involvement had always carried some risk, even if they only offered security.
‘‘There was always a risk the children would encounter challenges that led to them not being able to make the repayments. Borrowing the money in their own name simply makes the risk more transparent to the parents.’’