17 September 2018
Kiwi parents are finding it harder than ever to help their children buy homes because certain bank lending requirements
mean that asset wealth is no longer good enough for mainstream financiers.
CEO of New Zealand’s largest peer-to-peer mortgage lender, Southern Cross Partners, Luke Jackson, said 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.
“It is still possible but not easy because, 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,” Jackson said
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?”
Jackson said 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,” Jackson
said.
“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.”
Jackson said 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), was 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.
For more information about P2P investing (including the risks) visit http://southerncrosspartners.co.nz or contact your investment advisor.
ends