As parents, we all want the best for our children, and that means helping them make responsible life choices and plan for a secure future. One of the easiest ways to do this is to encourage sound, long term investments like property, but getting a foot onto that ladder can be daunting when you’re just starting out in the adult world.
“It definitely pays to become a property owner as early on in life as possible,” says Bill Rawson, Chairman of the Rawson Property Group, “but trying to get a bond on a starter salary – even in a high-paying career – can be difficult to do. A sectional title unit in a good area with good growth prospects can easily cost R1 million and more – that’s nearly R10 000 a month in bond payments, assuming you can secure a 100% loan, which is extremely rare these days.”
To qualify for a bond of that size, your child would need to be earning around R35 000 per month. Needless to say, not many recent graduates have that many zeros on their payslip, but that doesn’t mean property is out of their reach – at least, not with a little help from you.
“There are two main ways parents can help their children become property owners at an earlier age,” says Rawson. “The first is to sign as surety for your child’s bond. This can help them 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.”
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 R9983.80 per month,” he says. “If your child can immediately deposit R500 000 into their bond account, borrowed from you, those repayments drop to R4991.90 per month. Of course, they’ll still need to pay you back, at around R3299.78 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 R8291.68 per month, or R1692.12 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 explains. “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.”
“As parents, our job is to protect our children’s interests as far as possible, and help them access the tools to build a life,” Rawson concludes. “What better way to do this than help them kick off their financial future with a solid investment like property?”