Should you help your kids climb the property ladder

It’s really expensive to buy a property in South Africa. Research conducted by FNB shows that, for 2017, house prices in upper-income areas cost around R2.892 million on average, while middle-income areas average R1.517 million, lower middle-income areas R952 964 and low income areas average around R503 305.

With homes starting from R503 305 it’s hardly surprising that first-time buyers are looking for help. There are also other costs such as legal fees and insurance to contend with and banks demanding deposits to lessen their risk burdens. Increasingly, the youth turn to “the bank of mum and dad” for assistance when it comes to getting a foot on the property ladder. While you’d want to help your offspring own a home, the question is: Should you?

To help or not to help

Experts are at odds over this issue. Crispin Inglis, co-founder of customer-focused online property business PropertyFox, says this is the one area parents would be wise to offer their children some help.

“It may not be prudent to hand out a shiny new car to an 18-year-old or bankroll a gap year as a kick-start to making their own way in life. But when it comes to investing in a first property, it may just be too tough at the moment for children to make it happen on their own. A range of factors – from the difficulty in getting a bond to the insanely high cost of living – all combine to make it a serious challenge to buy a first property.”

There are many reasons to help your children get onto the property ladder. Your motivations may not be entirely for their benefit though. “When you consider, also, how high rental is these days, you may be faced with the possibility of your children living with you well into their twenties if they aren’t able to buy. A prospect many parents aren’t overly keen on. So I’m all for parents helping with a deposit or helping secure a loan. Owning property really is the first step in long-term wealth creation so this can help your children grow to be truly financially independent,” says Inglis.

He added that parents could consider putting a little bit away each month for a deposit on a property for their kids while they are still young.

Financial adviser Sylvia Walker advises parents to tread carefully and establish first if they are able to afford the investment. “It’s fine if parents can afford it and aren’t putting themselves in a compromising position to do it. If you can’t afford it, don’t do it.”

And if you are already a pensioner, banks may not look upon you favourably if you want to try getting a home loan on behalf of your children. “It would be difficult for pensioners to get a home loan as they are on a pension for income and their age may mean they won’t qualify for a loan,” points out Walker.

If you do say no, remember that there are plenty of other ways that your children can get onto the property ladder. Walker says it’s better to teach children “to fish rather than give them the fish”. She encourages parents to teach their children to save for their first property investment.

She does, however, concede that parents may lament the fact times are not as easy for their children as they were for them when they first bought property – times when it was possible to purchase a home that you liked and in the suburb you were after. Now, says Walker, this may not always be possible.

“It’s very expensive getting on to the property ladder. I’m a big believer that the first property should be an investment property that children can rent out until they are in a position to sell it, make some profit and live in the next home themselves. Or tell your children to buy a small property, bachelor pad. It’s important to do your homework though to make sure you are buying a good investment,” explains Walker.

If your children have their heart set on a home in a particular suburb the other alternative would be to encourage them to invest along with a sibling or trusted friend. But this can be tricky. Make sure that the children agree to have both their names on the bank loan and to establish an agreement about what should happen if one of them were to move out and who would maintain it and pay for things such as insurance, electricity and water.

“They also need to think about what would happen should one of them die or if one of them loses their job, especially if they are jointly responsible for the loan. Ask them how they would cope with that. Tell your children to buy the necessary insurance to solve those kinds of events. Make sure they have the cover that they need,” advises Walker.

It's good to get in now

Overall, property can be a good investment if you buy the right home, take care of it and maintain it. According to Absa, over the last 20 years property prices grew by 12.4% before inflation until December 2016. This type of growth is nothing to sneeze at. “Inflation was 5.8% so it’s a real return of 6.6% over 20 years. There is growth in property long term – definitely,” says Walker.

If you can afford to help your children get onto the property ladder either through deposits, loans or surety, it’s best not to delay your decision too long. “The younger you can get in the property market the better – because the longer you leave it the more difficult it becomes.

“Generally, the older you get the more money you earn but if you delay it, the difficulty increases and there are many people in their late 30s and 40s that are renting and will always do so as they missed the opportunity. The cheapest time in your life is before you get married and have children,” points out Walker.

Good news for the first-time buyers 

The slight decline in mortgage rates in July combined with slower house price increases is making it more affordable for first-time buyers to get into the market, says Shaun Rademeyer, CEO of mortgage originator BetterBond.

Rademeyer says the rate of house price growth over the last 12 months has been considerably slower than the rate of salary growth and there has been a significant increase in the number of 100% home loans, the majority of which go to first-time buyers in the lower income brackets.

Betterbond statistics show that the average price in the first-time buyer sector of the market increased by just 4.3% in the 12 months to end-July (compared to 5.6% in the previous 12 months), while the latest available Bankserve figures put the rate of salary growth in the 12 months to end-Jun at 6.7%.

Meanwhile, the percentage of home loans being granted for 100% of the purchase price has risen from 39% to 41% in the past 12 months, while the percentage of loans being granted to buyers with deposits of 10% or less has risen from 8.5% of all loans to 9.5%.

However, due to the political and economic upheavals, home loan applications have declined

“The good news, however, is that current home loan applicants are generally in better financial shape in the sense that many have spent time paying off other debts so that they have more discretionary income to pay home loan instalments,” says Rademeyer, who adds that as a result, the percentage of applications that are declined outright by the banks has fallen from 27% to 25% in the past 12 months, while the percentage of immediate approvals has risen from 33.7% to 36%.

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