If you’re dreaming of stepping into your very own home, getting a monetary gift can give you a serious leg-up. In this article, we will get a handle on how these gifts can help get you into the property market and what you need to do to make the most of them.
The Basics of Gifting
When you’re looking into buying your first home, receiving a financial gift can be a big help.
A gift is typically money that’s given to you without the expectation of repayment.
In many cases, parents or close family members provide such gifts to help with the deposit on a house.
Now, this doesn’t have to be “cash”, per say, it can also be a gift by way of equity in a family member’s house. Equity gifts can be quite complex as they generally involve a repayment, but there are some nifty ways to structure this type of gifting so make sure you talk to a Mortgage Adviser first.
Thankfully there are no taxes on gifts in New Zealand and there’s also no limit on how much money can be gifted. However, lenders have their own rules about gifts. They usually require a gifting declaration.
This document states that the money is indeed a gift and not a loan. It’s essential to have this paperwork sorted out to assure the lender that no additional debt obligations will arise from the gifted amount.
If the gift is “sort of a loan”, such as in the case of an equity gift (i.e borrowing against your parents property), then this will need to be factored into your debt servicing calculations. Again, this can be complex so it’s best to engage a Mortgage Adviser to show you how it works.
The Home-Buying Advantage of a Gift
Receiving a gift can significantly impact your ability to purchase a home.
For starters, it can increase the size of your deposit, potentially opening up better mortgage rates and more borrowing options.
A larger deposit also means owning a greater portion of your property outright, which can be beneficial for long-term financial stability and paying less interest overall.
Lenders view applicants with larger deposits as lower risk, which can make the mortgage application process smoother.
However, it’s important to understand that gifting does not guarantee a mortgage approval.
Lenders will still assess your overall financial situation, including your income, expenses, credit history, and the property’s value. The gift will be considered as part of your financial assets during this evaluation.
Properly documenting the gift as non-repayable is key to ensuring it’s counted towards your deposit without affecting your debt-to-income ratio OR if there are repayments involved, depicting how and when these are to be made so it can be factored into the overall calculations.
Getting the Most Bang for Your “Gift Buck”
If you can, use the gift along with your savings/Kiwisaver to reach at least a 20% deposit. This can help you avoid the need for Lender’s Mortgage Insurance (LMI), which is an extra cost for buyers with deposits less than 20% of the property’s value. This can sometimes be called a Low Equity Premium (LEP) or Low Equity Margin (LEM) depending on the bank you go with.
Additionally, by increasing your initial equity in the property, you also start off with more pieces of the property pie which can lead to more favourable mortgage terms.
Important Things to Think About When You’re Given a Gift
While gifting can be an excellent way to contribute to a home purchase, it’s not without potential risks.
The primary concern is the impact on the giver’s financial situation. Those giving the gift have to make sure it doesn’t leave them short for their own future cash needs or retirement plans.
For the recipient, one risk is that if the gift is substantial, it might affect eligibility for certain first-home buyer programs that are designed for individuals with limited funds. It’s best to talk to a Mortgage Adviser if this is the case to see if you will still meet the criteria for any assistance you plan to apply for.
And finally, unlike an investment, the giver of the gift has no claim to any future property appreciation or equity, which can sometimes lead to misunderstandings or disputes within families. It’s best to seek independent legal advice upfront so everyone is on the same page from the get go.
It also pays to consider the long-term implications a gift may have on relationship dynamics. Gifts can change the expectations or behaviour within relationships, so it’s important to address potential issues head-on.
Remember, buying your first home is a significant step, and a financial gift can make a substantial difference in your journey.
A Trusted Mortgage Adviser can help you and your family navigate the process, leveraging the gift effectively, and paving the way for a smooth home-buying experience.
Applications for finance are subject to meeting the lenders criteria, terms, and conditions. Refer to our website www.hbmi.co.nz for our Public Disclosure Document.
