Give Your Children a Boost Up the Property Ladder

The South African property market currently favours buyers, with improved affordability and low interest rates providing potential home owners with the perfect opportunity to start climbing the real estate ladder, especially young adults looking to make their first purchase. However, many young first-time buyers are not able to take advantage of favourable market conditions due to the fact that they simply cannot afford a deposit. In select cases however, their parents are able to assist by providing them with money for a deposit, whether as a gift or a loan, and can potentially gain significant financial benefits in the long-term.

According to Kevin Mountjoy, National Sales Manager at ooba, many young adults can afford home loan repayments, but are unable to secure a home loan as they don't have a sizeable deposit available. The average deposit is 14.9% of the purchase price and as banks tend to look favourably at buyers with a deposit, insufficient deposit size is one of the main reasons a bank will decline a home loan. He says that property has proven to be a secure long-term investment and as a result, it is advisable to enter the property market at an early age in order to benefit from the long-term prospects of growth.

"Parents inherently want their children to succeed in life and, after education, helping your children invest in property is another way of securing financial security. A property in your child's name will not only provide them with an asset that will appreciate in value over a period of time, but will also provide them with a good financial platform from which to grow."

Mountjoy advises that parents who have decided to assist their children with a deposit should ensure that they are doing so correctly in order to maximise the advantages of the purchase. "When lending children money, parents can either raise capital via a second bond or take money from their savings, should they have sufficient funds. From an investment return perspective, it is beneficial to lend money from savings instead of financing a second mortgage, as interest rates are much higher for debt than what one would be earning on their savings.

"This, however, depends on the extent of savings and where they are invested. Should extracting the money from savings not be an option, a second mortgage should be the next option as interest rates on home loans are generally lower than on unsecured loans such as personal loans."

Mountjoy says that when taking an advance on a home loan, parents must be careful that they do not worsen their rate concession on the entire loan, given that home loan interest rates have moved significantly from a few years ago when "prime less" rates were common. "For example, if parents have an existing R1 million outstanding home loan at prime less 0.5% and request a further advance of R100 000, the bank is likely to adjust the interest rate up on the entire R1.1 million. However, if parents have excess funds available in the home loan, accessing these would generally not impact the interest rate that is charged." He says another option is to give the deposit money as a gift.

"Parents should be aware of the tax implications of such a gift. Funds given as a gift that exceed R100 000 during any tax year are subject to a donations tax, for which the donor, in this case the parent, is liable for. "Another benefit for children lending money from their parents for a home deposit is flexibility with regards to payment terms, as parents can request that the interest is paid back after the initial lump sum has been repaid."

When deciding which path to follow, it is important that all parties involved are comfortable with the arrangement. "It is advisable to draw up a formal document to ensure all family members are on the same page as to whether the money is a gift or a loan, and what the terms of the agreement are, for example what interest will be paid and when the money will be paid back. While it might seem a bit extreme when dealing with family, it is important that this is drawn up and signed by all parties so that there are no misunderstandings down the line," concludes Mountjoy.

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