The market has got a bit tougher for first home buyers if you don’t have a deposit, especially if you have other debts! One way of getting around this is using a parent as a guarantor. Another option is for the vendor to leave behind a deposit in the property.
How it works
You agree a sale price with the vendor which needs to be no more than a current registered valuation of the property. You only pay 80% of the sale price with the remainder treated as a second mortgage, repayable over five years.
So if you buy a place for $300,000 we arrange a mortgage with a lender for $240,000. It is interest-only to keep repayments as low as possible. We then arrange the $60,000 vendor finance as a second mortgage that is fully repaid over five years. The vendor finance will have a commercial interest rate on it of say 6.00% to 8.00% so can be a nice little earner for the vendor.
Vendor finance can come in many forms. A unique option that the team at Key2 (a specialist real estate firm) have come up with is that the vendor guarantees the property value will appreciate, otherwise the vendor finance is forfeited to the buyer (you.) If you want to buy high-quality apartments in or around Auckland, this could be a great way of getting around the usual 20% deposit required by banks. It is not for everyone, but if you are interested in looking at vendor finance options give us a call us to discuss.
Think of vendor finance as another one of your negotiating tools. In a slow housing market, vendors are more open to exploring these options with you. It is important if you are considering vendor finance that you get good advice and are getting a good deal. I am a fan of vendor finance but only where it is done properly and with integrity.
You can download our vendor finance tips sheet here