Author: Carl Coetzee
1 March 2021
HELPING YOUR CHILDREN ONTO THE PROPERTY LADDER
Getting onto the property ladder is one of the most important financial investments for younger generations. But, with the average age of South African first-time buyers around thirty-six, young adults may be struggling to raise funds for a deposit for their first home or, they may be nervous about making such a big financial commitment.
With the current low interest rates, there has never been a better time to finance a property and if you have considered helping your children to get a foot into the property ladder doorway, now may be the time to do it says Carl Coetzee, CEO of BetterBond.
You can purchase property with your children. By pooling funds in this way, it could help to secure a bigger bond or a better property and this is certainly more cost-effective for first-time home buyers he says.
“There is 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”.
Helping your children this way is a win-win. You are investing in a second property and they can purchase their first home, but it is important for all parties involved to be aware of what they are getting into he advises. “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 have 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, how the 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 to sell the property, how profits or losses on the property will be split and anything else that may result in a potential dispute.
That said, this type of contract is a private agreement between the co-owners, and it 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 show 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 purchase a property as a co-owner with your children, but you do not 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 have paid off your bond or if you have a small amount left to pay. You are likely to pay a lower interest rate than a first-time home buyer would, but it would be worth getting tax advice on whether you will 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 in your child’s name only, but this will require a great deal of trust.
- Downsizing to a smaller home. Depending on what life stage you are at, you may decide it is time to downsize and to purchase a smaller home. This move down the property ladder will release funds that you could invest into jointly purchasing property with your children. Using any profits made from your house sale in this way should only be done if you have sufficient pension funds in place.
The biggest downside of purchasing property together is that if your children default on their share of payments, you are still liable for the whole bond payment. If you are at all concerned about this, it may be less risky overall to give your children a helping hand towards raising their own deposit.
- Help them to save. It pays to think of your children’s future financial needs and to help them save towards this. If your young adult children are working, but still living at home, it is a good idea to charge them rent and to put a portion of this aside in an interest-bearing account in your name, to give them towards a deposit when they are ready to become first-time homeowners.
- Get legal advice. Whatever route you decide to take in assisting your children with property does not just depend on whether you have the money to help, it is also about family relationships and dynamics. Money matters can easily cause family rifts. Get legal advice on the route you choose to take.
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