Buy a house for your kids!
We all want the best for our kids, and today that means helping them buy their first starter home.
25/07/2017
Rawson Property Group recently posted an article on how difficult it is for young adults to get a bond on a starter salary – even if they high-paying jobs. According to Bill Rawson, chairman of the Rawson Property Group, a sectional title unit situated in a decent neighbourhood, will easily cost around R1 million or more. That's going to cost almost R10,000 in monthly home loan payments, and that's assuming they are eligible for a 100% loan, which is extremely rare these days.
To qualify for a home loan to cover the purchase price, the buyer would need to earn around R35,000 per month, said Rawson. "Needless to say, not many recent graduates have that many zeros on their pay slip, but that doesn’t mean property is out of their reach – at least, not with a little help from you."
Rawson states that there are two main ways parents can help their children become property owners at an earlier age:
1. Sign as surety for your child’s bond
Signing as surety with held your kids qualify for a much larger bond than they otherwise would have been able to access, as their income will be added, but it does come with a lot of risk, which isn’t ideal.
2. Consider a loan
If high risk doesn’t thrill you, Rawson recommends the less risky option of a parent-to-child loan. "A bond may be the cheapest type of formal financing available to most people, but that doesn’t mean it’s inexpensive – especially these days with interest rates on the rise," says Rawson. As a parent, if you have access to capital, loaning some money to your child to put towards their property at lower interest rate can go a long way towards increasing the affordability of their investment.
To illustrate his point, Rawson extrapolates from a hypothetical R1 million property:
With a 100% bond at 10.5% interest, repayments on a R1 million home would currently be around R9,983.80 per month. If your child can immediately deposit R500,000 into their bond account, borrowed from you, those repayments drop to R4,991.90 per month. "Of course, they’ll still need to pay you back, at around R3,299.78 per month assuming a 5% interest rate over the same length of time as their existing bond. In total, that means their payments add up to R8,291.68 per month, or R1,692.12 less than they would have paid without your assistance. That can save them as much as R400 000 over the lifetime of their loan."
To further protect yourself, and your child, Rawson recommends drawing up a loan agreement allowing you to take over the property should your child fall into serious arrears on their repayments. "This gives you the opportunity to rescue the investment in an emergency, rather than see it repossessed by the bank," he says.
On a related note, Rawson points out that property can also be a great way to protect your child’s inheritance from reckless spending. "Bequeathing a rental property to your child instead of money, and restricting the sale of that property for a set period of time, can be an ideal way to supplement their income without allowing them to squander the main bulk of capital," he explained. "I’ve seen many cases where this kind of income has seen a reckless beneficiary safely through a difficult period when large amounts of cash would have only have fuelled their irresponsible behaviour."