At the moment estate agents are calling this a buyers’ market as property prices have come off their highs and interest rates are at historic lows. However many young first-time buyers are not able to take advantage of favourable market conditions due to the fact that they simply cannot afford a deposit. In select cases however, their parents are able to assist by providing them with money for a deposit, whether as a gift or a loan, and can potentially gain significant financial benefits in the long-term.

According to Kevin Mountjoy, National Sales Manager at bond originator ooba, many young adults can afford home loan repayments, but are unable to secure a home loan as they don’t have a sizeable deposit available. The average deposit is 14.9% of the purchase price and as banks tend to look favourably at buyers with a deposit, insufficient deposit size is one of the main reasons a bank will decline a home loan.

“Parents inherently want their children to succeed in life and, after education, helping your children invest in property is another way of securing financial security. A property in your child’s name will not only provide them with an asset that will appreciate in value over a period of time, but will also provide them with a good financial platform from which to grow,” says Mountjoy.

Mountjoy advises that parents who have decided to assist their children with a deposit should ensure that they are doing so correctly in order to maximise the advantages of the purchase.

“When lending children money, parents can either raise capital via a second bond or take money from their savings, should they have sufficient funds. From an investment return perspective, it is beneficial to lend money from savings instead of financing a second mortgage, as interest rates are much higher for debt than what one would be earning on their savings.

“This, however, depends on the extent of savings and where they are invested. Should extracting the money from savings not be an option, a second mortgage should be the next option as interest rates on home loans are generally lower than on unsecured loans such as personal loans.”

Mountjoy says that when taking an advance on a home loan, parents must be careful that they do not worsen their rate concession on the entire loan, given that home loan interest rates have moved significantly from a few years ago when “prime less” rates were common.

“For example, if parents have an existing R1 million outstanding home loan at prime less 0.5% and request a further advance of R100 000, the bank is likely to adjust the interest rate up on the entire R1.1 million. However, if parents have excess funds available in the home loan, accessing these would generally not impact the interest rate that is charged.”

He says another option is to give the deposit money as a gift. “Parents should be aware of the tax implications of such a gift. Funds given as a gift that exceed R50 000 during any tax year are subject to a donations tax, for which the donor, in this case the parent, is liable for.

Mountjoy says another benefit for children borrowing money from their parents for a home deposit is that the parents can agree to a more flexible repayment term in order to make it more affordable. For example the agreement may be to just pay back the interest each month until they are in a position to pay back the lump sum.

When deciding which path to follow, it is important that all parties involved are comfortable with the arrangement. If as a parent you are concerned that your child may not be in a position to pay you back and you rely on that money, rather do not lend them the money in the first place. Borrowing money can sour family relationships.

“It is advisable to draw up a formal document to ensure all family members are on the same page as to whether the money is a gift or a loan, and what the terms of the agreement  are, for example what interest will be paid and when the money will be paid back. While it might seem a bit extreme when dealing with family, it is important that this is drawn up and signed by all parties so that there are no misunderstandings down the line,” says Mountjoy.