Are you interested in owning your own home, but getting all the finance approved is proving tricky?
You are not alone. Sky-high property prices are making the purchase of a home difficult for first-time South African buyers or people with modest incomes. Home ownership is a big contributor to building wealth in our country, so a foothold in the property market is something all of us are striving towards.
If you can’t buy your home outright, you could always do it with a friend or family member, right?
Yes, that’s certainly an option. Pooling financial resources with a friend or family member can be an effective way to get into the property market (if you can’t get all the finance approved yourself). It enables you to qualify for a larger bond, to potentially buy in a better area, and it keeps other upfront costs, like bond registration and transfer duties, down (you end up sharing them with the co-owner).
Most banks are happy to finance co-ownership because it spreads the risk on the property. In other words, if one party can’t pay the bond then the other party automatically becomes liable. To qualify for a bond each party needs to submit an application detailing their income and employment etc (the process doesn’t change if its a single or joint application).
The purchase is relatively easy if all the boxes are ticked. The challenge comes in on the relationship side. If the relationship is strong and healthy then it should run smoothly but if the relationship breaks down, then things could get unpleasant.
Do you have an exit strategy?
If one of the parties decides they want out of the arrangement it could cause a few headaches. It’s vital that you agree on an exit strategy before you jump in and make the long-term commitment. Sometimes this process will even discourage you from doing a deal because of major disagreements about levels of commitment – and this is a good thing 🙂 Rather find out sooner rather than later.
The most sensible arrangement is for the departing party to agree to be bought out by the other owner. However, this all rests on the ability of the other party to afford the bond on their own, therefore a minimum time of commitment should be set so incomes can catch up with bond repayments.
The parties should also draw up a contract with an attorney covering parameters for selling, and contingency plans should one of them fail to pay the bond (worst case scenario). It’s also useful to set out some house rules regarding responsibilities of maintaining the property, house guests, pets and other hot topics – without becoming too pedantic 🙂
Life insurance to settle the bond is a must!
It’s vital (if the co-owners do not have a legal relationship i.e. marriage or civil union), that they ensure that they are responsible for settling the debt should one party pass away. Both parties must agree to this and it’s important for both parties to check annually that the cover has not lapsed.
A final thought.
Most people enter into new ventures with the best intentions. The problem is that life happens while you are making plans, and people do end up changing their minds. Investing in property with a family member or friend could work, but what if it doesn’t?
That’s the stuff you need to consider carefully.
Until next time
The Wise About Life team
