Source: http://www.stuff.co.nz/stuff/0,2106,3215648a10,00.html
No-deposit mortgages enter the banking mainstream this weekend - but they could tie struggling first home buyers to their parents for life.
Budget experts warn that the National Bank's new 100 per cent mortgage option could be a disaster for those coping with student debt and rising house prices.
The average home is now worth about six times the average salary.
'Our files are full of sad cases of people who stood as guarantors,' said David Russell of the Consumers' Institute.
The move by a mainstream bank into no-deposit loans comes as rising interest prices put a first home out of reach for many.
Home ownership levels fell from 74 per cent in 1991 to 68 per cent last year.
The National Bank's First Home Buyers' Options scheme enables parents and other family members to use equity in their homes to guarantee the traditional five per cent deposit portion of the mortgage, or parents to make joint borrowing arrangements with their children.
The bank would insist on separate interviews with parents and child, and recommend each get independent legal advice to ensure that no tensions arose.
That's just as well, says Russell, as becoming a guarantor can lead to trouble if the children cannot repay the loan, though he conceded that the default rate on home lending was so low as to be almost non-existent.
For the National Bank, the mortgage package will create a new class of borrowers, those who would love to escape the rent trap but lack the capital.
First home hunter and Auckland magazine subeditor Mark Broatch says it's about time someone started innovating to help homebuyers.
'I think anything they can do to help first time home buyers has got to be a good thing. Some people now are getting into their 30s, like me and my partner, and haven't been able to save a deposit.
'I would certainly look at it.'
'But he thought many parents would rather hand over money rather than risk their homes as a guarantor.
Astrid Hutchinson, a 26-year-old government worker in Wellington, said she would be uncomfortable asking her parents to guarantee her deposit.
The Environment Ministry executive officer said she planned to save as much deposit as possible to keep her mortgage repayments to a minimum.
The 100 per cent mortgage seemed too risky, she said.
'I think you'd probably just end up paying it off forever.'
The interest on a $220,000 house with a $200,000 mortgage at 7.8 per cent over 25 years is $212,767, with monthly payment sof $1517.
A 100 per cent loan over the property would yield the bank $234,043 with monthly payments of $1668.95.
Because parents are guarantors, the risk is shifted fromt he bank. Should the mortgage fall into arreaars and a mortgagee sale be forced, the guarantors bear the loss.
State-run schemes to make it easier for young people to get into their own home have focused on poor, rather than middle New Zealand. A trial government-sponsored scheme called In Reach run by Kiwibank requires no deposit for home loans up to $150,000 for households with income of no more than $65,000 a year, or $100,000 a year with three or more main sources of household income and all income earners are co-borrowers.
National Bank official Craig Sims says the bank's aim is to help Kiwis get ahead.
And to guard against people overstretching themselves, the bank used the same lending criteria as it did on 95 per cent home loans.
Sims said that for younger Kiwis, fighting to pay off their share of the country's $7 billion-plus student loan while paying rent and trying to save a deposit, the scheme made good financial sense.
And for parents with equity in their homes, and a desire to help children get on ini life, standing as a guarantor was a way of doing that without handing over a lump sum.
They had control in limiting the amount guaranteed to a small portion of the equity in their home - a maximum of 25 per cent. Once the value of the property rose, the mortgage could be refinanced, ending the parents involvement.
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