With house prices increasingly unaffordable, the number of children turning to the Bank of Mom and Dad for assistance getting onto the property ladder has increased.
Happy Ngale, Alexander Forbes Financial Planning Consultant, has some tips on how parents can assist, and what they need to consider before handing over the cash.
There is nothing as powerful as information
Learn about the property market as a parent - the different types of property investments such as listed property, unlisted property and immovable property. Once you have educated yourself, start preparing your children as early as possible. Have money conversations with your children at their level. Start to pass on the knowledge you have acquired as a parent. This will help your children determine what sort of property market they want to invest in. Teach your children how to save for a deposit for property and what it takes to finance property as well as maintain it. The information will also include budgeting, goal-setting and saving. Include the basics about compound interest, risk and return and the assets you borrow for.
Investing in a property fund/portfolio for your children
The property fund which is a form of a unit trust is an alternative way to invest in property. Investors buy 'units' in an investment property or properties, which are managed by a professional investment manager. This could provide your children with future cash flow or used to supplement their retirement investment.
Opening a long term investment plan
This will help to invest on a monthly basis and save for the deposit. This is suitable for parents whose children are still young. This should be done with the plan that as soon as your child secures their first job, they already have a deposit for property and can proceed with the monthly housing loan repayments. With the investment at hand, your children already have an incredible future in property investment set for them. If you start with an entry level property, the repayments towards the loan would be affordable.
Provide your child with a deposit or better yet the total capital
If you are providing your child with the lump sum either a deposit amount of capital, you need to be clear as to whether it’s a loan or a gift. If it’s a gift, parents must consider the tax implications. If the money is given as a loan, it’s an advantage to your child because as a parent you can decide on whether interest is payable or not. You can also together with your child decide on the repayment amount ensuring it’s within their means. Parents should care to obtain a legal contract that stipulates all terms and conditions. The parents would also need to specify such loans in their wills especially if they wish to convert the loan to an inheritance in cases of death.
Buy a house together - joint home loan
Your child might have capability to pay for the bond but does not have enough credit history and therefore is not eligible for a home loan. Some banks in South Africa accept joint home loan applications. The financial credit history and financial position of the parent will be beneficial at application stage. Parents should know in such cases that they are equally liable for the bond as the children. Therefore, a level of understanding must exist to ensure the child does not default on the payments towards the bond. Parents should ensure they are financially healthy and capable of taking on the risk.