Cape Town – Owning your own home is synonymous with financial stability and parents can play a vital role using their own healthy credit profile to help their young adult daughter or son purchase their first home.
“As a home will probably be your child’s biggest asset in their life, it makes sense to help them out as a parent,” said Monde Motha, channel manager at FNB Home Loans. “However, there are a few aspects to consider when deciding to help your son or daughter buy their first place which will help them get their best start as a home owner.”
Did your parents buy you your first house?
“Generally as you are older, you have the benefit of joint incomes, an established credit record as well as better earning power. Without these aspects, it is more difficult to raise money for a deposit, get a loan from a bank as well as maintain the bond, making owning a home a daunting prospect for any young adult,” said Motha.
According to the FNB estate agents survey, first time home buyers made up 28% of total home buyers in the second quarter of 2014. First and foremost, it is important to establish why your son or daughter wants to be a home owner and whether they are being realistic in what they want.
“Buying your first home is a big step, and also a very big financial commitment,” said Motha. “Your child needs to understand that repayments will account for a big chunk of their monthly income, which may mean they aren’t able to afford additional expenses such as studying further or trips away with friends.”
It is not only a big financial commitment, but also a long-term commitment.
Not only should you discuss the financial implication in detail, but what plans they have for their future, are they still planning on travelling, what will happen if they change jobs, or cities?
“If they don’t have a reasonable plan for at least the next few years, they possibly shouldn’t be committing to a 20 year bond,” said Motha.
After establishing need, affordability is key to home ownership. Carefully go through all the aspects of home owning that they may not be aware of including legal costs, bond registration costs, how much they have in terms of a deposit as well as how they plan to finance their monthly bond costs.
“Remember to teach your child not to be fixated on the cost of the property alone when assessing affordability but to consider it in its totality,” said Motha.
Remember all the costs
They will have other ongoing fees on top of their monthly bond repayments. These fees include household insurance, levies or municipality bills, electricity and water as well as general maintenance.
“It is helpful to run through the different scenarios with them, use tools at your disposal such as property affordability tools to understand all the costs involved in the actual bond,” said Motha.
“Also show them your own examples of municipality bills, household insurance and estimate the costs involved on top of their bond repayments.
“You can also suggest ways of relieving the financial pressure, especially in the first stages of bond repayments, such as bringing in a housemate as a temporary measure,” said Motha. “This will make a big difference to their disposable income and allow them some financial freedom.”
Stand surety for your child
One tangible way of helping your son or daughter purchase their first home, is to stand surety or do a joint application.
“FNB and other banks offer loans to multiple applicants, this means that you can be considered as part of the loan agreement and your credit and financial position will be taken into account when assessing the loan,” said Motha.
Depending on the number of people applying for the loan, a person signing as a joint applicant is considered as a part of the application and all of the parties involved are subject to the credit assessment process.
You’re both liable for the bond
The benefit of this is obviously that your child will have a better chance of getting a bond, however there are negatives to take into account for your own financial position.
“When applying for a bond as a joint applicant, you will be liable should your son or daughter default and is no longer able to afford to repay the bond, which means you will be held responsible, together with your child to recover the payments towards the home loan and any other legal costs incurred,” said Motha.
Motha advises that it is crucial that your adult child is well informed and fully understands the importance of maintaining the monthly repayments.
“As a consequence of defaulting on the loan, all parties will end up having a poor payment profile with the Credit Bureau which could impact whether credit is extended to them in future.”
Home buying as a young adult isn’t always an easiest experience, but you as a parent can help smooth the way for them, through sound advice and support and when able, financial assistance in the form of standing surety, or even helping with the initial deposit.