Parents can facilitate entry into property market

TRYING to get a bond on a starter salary – even in a high-paying career – can be difficult to do, and this can make it a challenge for a young person to become a property owner, says Bill Rawson, chairman of the Rawson Property Group.

“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 rare these days,” says Rawson.

“To qualify for a bond of that size, you would need to earn around R35 000 per month.

“Needless to say, not many 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 would have been able to access, as their income will be added, but it does come with a lot of risk.”

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 is inexpensive – especially these days with interest rates on the rise,” he says.

“As a parent, if you have access to capital, loaning some money to your child to put towards their property at a lower interest rate can go a long way towards increasing the affordability of their investment.”

To illustrate his point, Rawson extrapolates from a hypothetical property worth R1m.

“With a 100% bond at 10.5% interest, repayments on a R1m home would be around R9 983.80 per month,” he says.

“If your child can immediately deposit R500 000 into their bond account, borrowed from you, those repayments drop to R4 991.90 per month.

“Of course, they’ll still need to pay you back, at around R3 299.78 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 R8 291.68 per month, or R1 692.12 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.

Rawson says 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.”