Pros and cons of family funding
Affordability remains the biggest problem for first-time homebuyers, with many having to delay a purchase until they are well into their 30s due to rocketing living costs and high debt levels – unless they are lucky enough to receive help from their parents or other family members.
“And this is not a phenomenon unique to South Africa,” says Carl Coetzee, CEO of SA’s foremost home loan originator BetterBond*. “The so-called Bank of Mum & Dad (BMD) has also been pouring money into the housing market in many other countries for the past few years.
“Recent research shows that in the US, for example, one-fifth of all 18 to 37-year-old buyers are now purchasing with family financial assistance, and that in the UK, the BMD gave young buyers more than R120bn worth of assistance last year. In Australia, the BMD has officially been recognised among the top 10 lenders in the country and is currently providing 20% of first-time home buyers with around R700 000 worth of assistance each.”
Over the past few years, he says, first-time buyer aspirations in SA have been helped by the banks’ increased willingness to lend to home buyers and to advance a greater percentage of no-deposit loans to low-income buyers.
“However, although there is no definitive research about BMD activity in SA, we believe it could be a strong factor behind the sustained housing demand among first-time buyers, when the economic decline would usually have indicated a falling percentage of such buyers.”
According to BetterBond’s statistics*, first-time buyers continue to account for more than half of all home loan applications (52%) and a rising percentage of the home loans granted (38,6% in the 12 months to end-October, compared to 32,9% in the previous 12 months).
However, Coetzee says, there are several factors for parents, grandparents or other BMD lenders to consider before they agree to help their adult children buy a property – usually by gifting or loaning them money to boost their deposit. “Such assistance can make all the difference to whether their children qualify for a home loan, or to the affordability of the monthly repayments.
“But those who are doing the lending must make sure they are not putting their own financial future at risk. People generally are living longer now, and often need much more money in retirement than they originally thought. It may thus not be the best idea for them to pull equity out of their own homes without a solid plan to get it back.
“Something else to consider is that just giving your children a large sum of money to cover a deposit could actually complicate the home loan application process, because banks will probably take a harder look at them to ensure that they have a good credit record and can actually afford to repay the home loan themselves. You will probably also have to document the fact that the money is a gift that you don’t expect to be repaid.”
On the other hand, he says, if you can only afford to lend your children the money and need it to be paid back within a certain time, it is quite possible that the banks would consider that a debt which, added to other debts, might disqualify your child from obtaining a home loan in any case.
“In short, BMD lenders who are keen to offer monetary assistance to first-time buyers should really seek professional advice on the best way to structure this, and perhaps explore alternatives such as creating a special account where they match whatever their children save themselves towards a deposit on a home.”