First home buyers are tapping in to the ‘Bank of Mum and Dad’, but not through offset mortgages.
Rather, the product which BNZ first launched in New Zealand in 2007, is mainly being used by home owners keen to keep a bit of capital aside to do renovations, invest elsewhere or keep as a rainy day fund.
Offset mortgages enable borrowers to not pay interest on X amount of their floating loans, if they have X amount of savings they’re willing to not receive interest on.
Borrowers can use both their savings, as well as those of others’ to write off their interest. In fact, they can connect numerous accounts to their mortgage, provided the accounts are all at the same bank.
So if a first home buyer has a $400,000 mortgage, and their parents have $100,000 sitting in a savings account with the same bank, the parents can forgo receiving interest payments on their savings, so their child doesn’t have to pay interest on $100,000 of their mortgage.
Given mortgage rates are higher than savings rates, this can be an attractive option.
While a borrower can only offset the floating part of their mortgage, they can fix as much of their loan as they like.
Borrowers will also be charged for offsetting ($10 a month in BNZ’s case).
Offset mortgages are offered by BNZ, Kiwibank and Westpac.
Offset mortgages being used by minority with decent chunks of spare cash
BNZ’s retail and marketing director, Paul Carter, says the uptake of the product has been “pleasing”, with BNZ borrowers saving $480 million in interest since 2007.
Looking at it another way, BNZ’s TotalMoney offset mortgage product makes up around half of its variable loan book.
However mortgage brokers say there hasn’t been a great deal of interest in offset mortgages - especially not from first home buyers.
Go2Guys’ Campbell Hastie and Your Home Loan’s Andrew Perry say the sorts of people interested in offset mortgages are those who aren’t throwing every cent into the purchase of a house.
This might include those keen to keep cash aside to upgrade their home, buy another property, or use the money for a business operation.
These observations aligns with Carter’s comments, as he notes those using TotalMoney generally have enough savings to offset half of their loans.
40% LVR rule means investors need their cash
Hastie says borrowers keen to tie in their funds with their mortgage have two options; use an offset mortgage or revolving credit.
“One’s just a reverse of the other,” he says.
“The difference though is psychological rather than financial, and it’s that you can see your money sitting there in its own bucket. If you need to see it, and you don’t want to see it mingled up in the mortgage, which is the revolving credit option, then offset is a great way of doing it.
“Price, interest rate and fees wise, offset and revolving credit look identical.”
However, Hastie recognises: “Most people are putting everything they’ve got into the purchase price. They’re not really hanging on to a lot for rainy day money. Either because they can’t, or because they see more sense in having a smaller mortgage.”
With the introduction of the Reserve Bank’s loan-to-value ratio restrictions, which require investors to have 40% deposits, he says investors need all the money they can get.
“I would say a lot of investors don’t actually have a lot of cash floating around, especially if they’ve made a purchase recently.”
‘Bank of Mum and Dad’ either gifts money or doesn’t help at all
As for people getting on the property ladder for the first time, he says: “I definitely see instances of family helping first home buyers - definitely.”
However this help is coming in the form of cash, rather than these sorts of arrangements.
Parents who can, are telling these kids, ‘Here’s the money, take it and use it’.
“I’ve never seen anyone want to have the ability to grab that cash back,” Hastie says.
Perry is on a similar page. He says: “Offset mortgages don't really help first home buyers as any money offsetting the loan doesn't impact on the bank’s credit decision.
“More common ways to help would be with… family guarantee type loans, gifted funds or via deed of acknowledgement of debt.”
However Perry says: “The biggest factor in first home buyer loans would be KiwiSaver. This is something I see in 90% of applications.
“In Auckland this generally means no Homestart Grant is available due to the house price caps, but the first home buyer withdrawal is still very useful - especially with the government tax contributions and employer contributions.
“For a couple on $50,000 each, if they max out their KiwiSaver at 8% and get the 3% from employer on top, plus government contributions, they're at almost $13,000 a year without any additional savings of their own.
“After four years they would have around $50,000, and some banks will lend to first home buyers in the current market with 5% deposits, so if you're looking at an [Auckland] entry level property between $600,000 and $700,000, then there are options out there.”
Offset mortgage rates
BNZ TotalMoney: 5.90%.
Kiwibank Offset Mortgage: 5.80%.
Westpac Choices Offset: 5.95%.