Affordability remains the biggest problem for first-time homebuyers, with many having to delay a purchase until they are well into their 30s.
Some people get help from their parents or other relatives, a phenomenon that is not unique to South Africa, says Carl Coetzee, chief executive of home loan originator BetterBond.
The so-called Bank of Mum & Dad (BMD) has been pouring money into the housing market in many countries for years.
“Recent research shows that in the US, for example, one-fifth of all 18 to 37-year-old buyers are purchasing with family financial assistance and that in the UK the BMD gave young buyers assistance worth more than R120billion 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 assistance worth around R700000 each.”
Over the past few years, Coetzee says first-time buyer aspirations in South Africa have been helped by the banks’ increased willingness to lend and to advance a greater percentage of no-deposit loans to low-income buyers. And although there is no definitive research about BMD activity here, “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”.
BetterBond statistics show that first-time buyers 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.
But there are several factors for parents or other BMD lenders to consider before they agree to help their adult children buy a property - usually by giving or lending them money to boost their deposit.
While such assistance can make all the difference to whether their children qualify for a home loan, or are able to make their monthly repayments, the parents 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. So it may not be the best idea for them to pull equity out of their own homes without a solid plan to get it back.
“Also, 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.”
If parents can afford only to lend children the money and do need it to be paid back within a certain time, however, it is quite possible that the banks would consider that a debt which, added to other debts, might disqualify their child from obtaining a home loan in any case, says Coetzee.
“In short, BMD lenders who are keen to offer monetary assistance to first-time buyers should 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.”