Guiding your children so that they can have the best means helping them make responsible life decisions and plan for a secure future. Encouraging sound, long-term investments like property is one of the easiest ways to do that.
Entering the property market as early as possible pays off over the long-term, but trying to get a bond on an entry-level salary is challenging. Bill Rawson, chairman of Rawson Property Group agrees that even in a high-paying career it can be difficult to do. “A sectional title in a good area with good growth prospects can easily cost R1m and more,” adds Rawson. “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 around R1m or more your child would need to be earning around R35,000 a month. Not many new entrants into the job market earn that kind of salary, that doesn’t mean property is out of their reach though. There are two main ways you can help your child.
Consider signing as surety for your child’s bond. This will secure a significantly larger bond. This option does, however, come with a lot of risk, which is less than ideal.
Rawson suggests the less risky option of a parent-to-child loan. 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 the investment.
To illustrate that a bond is not always an inexpensive method of financing Rawson extrapolates from a hypothetical R1m property.
The maths: “With a 100% bond at 10.5% interest, repayments on a R1m home would currently 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. This can save them as much as R400,000 over the lifetime of their loan.”
To protect yourself, and your child, you should draw up a loan agreement allowing you to take over the property should your child fall into arrears on the repayments. You are then able to rescue the investment rather than see it repossessed by the bank.
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.”
Helping your child by protecting their interest and helping them gather the tools to access the best life possible is the chief responsibility of a parent. What better way to do that than help them secure their financial future with a solid investment.