One of the property trends in South Africa, and indeed across the continent, is for extended families to buy a property together. In the current environment where the interest rate is still hiking, this allows the homeownership dream to become a reality. Instead of, for example, two siblings attempting to buy two separate properties, they can pool their finances and purchase one home together - that is, if they are prepared to live together, or even better, rent it out and earn an additional income.
WATCH : Everything you need to know about property co-ownership.
The ‘multi-family’ home loan is something that Absa has catered for. Zydah Manuel and Julian Pick from Absa Home Loans outline the pros and cons of this type of investment and expand on the concept.
“The obvious advantage of pooling family resources is that more participants on a home loan application mean the home loan becomes more affordable,” says Manuel/Pick. “And in the current market, where home ownership dreams are being dashed because of the interest rate or job insecurity, this is a great solution.”
How it works requires setting up a trust or legal entity that can have up to 12 trustees, if it’s a trust or directors/shareholders for a company or a close corporation. These instruments are also known as ‘special purpose vehicles’ (SPV), and the advantage of having one in place means that the trust or company can eventually invest in any number of properties.
“Once a property is purchased through an SPV, the property is deeded to that trust or company,” explains Manuel/Pick. “This is the only way to apply for a home loan at Absa if the number of members that want to buy a house together exceeds three. Under three, they can buy a property jointly in their individual names.”
Either way, an exclusion applies to those younger than 18 and those older than 63 years. Each applicant or member of the trust/company is also credit-checked and affordability analysis undertaken. “These are required by law because all the participants on a home loan are jointly and severally liable for the total monthly home loan repayments, taxes, and all other legal and administrative fees associated with the purchase of the property,” says Manuel/Pick.
“Once a home loan is granted, only one debit order transaction is loaded for repayment of the home loan account, which must be the minimum required. However, should they wish, all other participants can make a deposit into the home loan separately, which will build up ‘excess’ - that being extra funds in the home loan account - that will effectively allow the home loan to be paid up faster.”
One of the concerns of those wishing to explore a multi-family property relates to when there are ‘excess’ funds in the home loan account. “Be reassured that these funds cannot be accessed by any one individual in the trust or company,” explains Manuel/Pick. “Accessing equity requires ALL participants to give consent.”
There are, of course, obvious cons to this type of home loan. For example, should one of the members wish to exit from the home loan agreement, a decision must be made by the remaining members whether they can afford to absorb, among them, the leaving member’s portion of the home loan repayment. This is not ideal because the leaving member’s name will remain on the deed.
The only way around this is what Manuel/Pick refer to as a ‘substitution of debt’. “This means a new home loan application will need to be processed and a full credit assessment of all remaining and new member/s is undertaken. This is to ensure affordability of the now ‘new’ home loan and will require a new registration at the Deeds Office, as well as the usual costs of registration.”
Death of a member is also a concern, which is why Manuel and Pick both recommend that an attorney should be consulted and a will provided for each member in the trust/company detailing what should be done with a member’s portion in the event of their death. “This attorney is also needed for drawing up the partnership agreement between the stakeholders, which will detail the finer aspects of ownership, how the shares are distributed, and the conditions for dissolving the partnership.”
Insurance is also considered a key element of the multi-family home purchase. “A bank may require applicants to have adequate life cover that will be ceded to the bank until the home loan is paid up. Similarly, it is wise to take homeowners insurance, which will cover the home in the event of an unfortunate incident such as fire or even a burst geyser,” confirms Manuel/Pick.
Whilst the initial costs involved in setting up a trust or company/close corporation and having to pay for the registration of a property may be hefty, once the property purchase journey is underway, it is not uncommon for the members to get the ‘property bug’. They tend to buy more properties when there is equity enough in the home loan to cater for all the upfront expenses. This is a great way, if there is trust and respect, to build a property investment portfolio and secure what could be a really pleasant ‘passive’ income.
Writer : Kerry Dimmer
