Helping your children to buy their first home
Getting onto the property ladder is one of the most important financial investments you can make. But, with the average age of the first-time homebuyer in South Africa being around 36, it's clear that young adult children may be struggling to raise funds for a deposit on a home purchase or may be nervous about making such a big financial commitment.
With the current low interest rates, there's never been a better time to finance a property, so if you've ever considered helping your children get a foot onto the property ladder, now may be the time to do it.
There are several ways in which you could aid:
You can buy a property with your children - pooling funds in this way could help secure a bigger bond or better property and is certainly a more cost-effective way for first-time homebuyers to get onto the property ladder, says Carl Coetzee, CEO of SA's largest bond originator, BetterBond.
'There's no limit to the number of individual applicants that can be included on a title deed owning a single property. Sharing the weight of such a large financial investment can make it possible for many people to enter the property market who might not otherwise have been able to,' he says.
Helping your children this way is a win-win - you're investing in a second property and they're able to buy their first home - but it's important for all parties involved to know exactly what they are getting into, advises Coetzee. 'There are certain things you need to consider when deciding whether co-ownership is for you. For example, will the cost of maintenance and repairs on the property be shared equally? Will bond repayments and the payment of rates be shared equally? What happens if one party is unable to make payments anymore?
'Once you've decided to go ahead, a written agreement should be drawn up outlining the details of the arrangement,' Coetzee explains. 'All terms must be agreed upon in this legally binding contract, to avoid any potential issues or confusion down the line, especially if all partners are equal in the contract, as no one party then has the authority to make decisions unless all are in agreement.'
The co-ownership agreement should entail who will live in the property; who will pay or contribute towards deposits and initial payments for the property; how ownership will be shared (it is automatically equal if not stated otherwise); who will be allowed to draw funds from the bond; what will happen in the event of the death or incapacitation of one of the co-owners; what will happen if one or more parties in the contract wishes to part ways or sell the property; how profits or losses on the property will be split; and anything else that might result in potential disputes.
That said, this type of contract is a private agreement between co-owners and does not impose rules on third parties. As far as banks are concerned, for example, you are still equally liable for repayments on the loan. So, if you default on payments, the bank can recover the full amount from any or all co-owners. It would be prudent for each co-owner to take out life assurance geared to cover the outstanding bond should that co-owner pass away.
'Clarity is key to a successful co-ownership agreement. All co-owners must agree on how things will work upfront, leaving no room for ambiguity,' says Coetzee.
Raising funds for your share
If you decide to buy a property as a co-owner with your children, but you don't want to be tied to monthly bond payments, you could cover your share by:
- Taking out a second bond on your own home, if you've paid off your bond or have a small amount left to pay on it. You're likely to pay a lower interest rate than a first-time homebuyer would, but it's worth getting tax advice on whether you'll have to pay capital gains tax on profits made on your share when the property is sold. You can avoid this if you buy together and the property is registered only in their name, but this will require a great degree of trust.
- Downsizing to a smaller home. Depending what life-stage you're at, you may decide it's time to downsize and buy a smaller home. This move down the property ladder will release funds you could invest into buying a property jointly with your children. Using any profit you've made from your house sale in this way should only be done if you have sufficient pension funds in place.
The biggest downside of buying a property together is that, if your children default on their share of the payments, you're still liable for the whole bond payment. If you are at all concerned about this, it may be less risky overall to rather give your children a helping hand towards raising their own deposit.
Help them save
It pays to think of your children's future financial needs and help them save towards it. If your young adult children are working, but still living at home, it's a good idea to charge them rent, and put a portion of it aside in an interest-bearing account in your name, to give them towards a deposit when they're ready to become first-time homeowners.
Get legal advice
Whatever route you decide to take in assisting your children with property doesn't just depend on whether you have the money to help, it's also about family relationships and dynamics. Money matters can easily cause family rifts, so however well you get on, get legal advice on the route you choose towards helping your child become a first-time homeowner.