Get to grips with home loans
Property finance is a complex process that may seem more full of hurdles and obstacles than necessary — a very frustrating thing when all you want to do is buy your forever home, or upgrade your existing property to be the home of your dreams. The process is complex because significant amounts of money are involved, and the National Credit Act compels banks to act in the best interests of people taking out loans, to ensure they will be able to afford the commitments they have made.
Jacques Embden, co-founder and managing director of Blok, a property development company based in Cape Town, says that homeowners need to have a fundamental understanding of the home loan process and all related costs, both short term and long term.
“I would definitely recommend speaking to a mortgage originator to fully understand the financial elements of servicing a bond, as he or she will consider the various impacts on your monthly cash flow, such as the impact of escalation in home ownership costs, as well as interest rate planning,” he says. “It is also crucial to take the time to discuss affordability with your banker.”
Before you start looking at (and falling in love with) properties, make sure you’ve got a meticulous budget, and that you know where you’re spending your money. While banks as a rule will grant loans based on payments that are a maximum of 30% of your gross monthly income, they will also look through your financial track record to gauge your behaviour with money. Cleaning up your credit record is a good place to start, and it’s a good idea to demonstrate that you are able to live well within your means, saving a portion of your income every month.
These savings will help towards making the deposit on your home. While it is possible to get a 100% — or even 108% loan for a property — banks view these loans as carrying greater risk, and you will likely be penalised for this with a higher interest rate.
The costs of which Embden speaks include transfer fees payable to the South African Revenue Service, which applies a tax on the purchase of every property. For the 2015/16 tax year, the first R750 000 of a property purchase is exempt from transfer duty, with the value of this tax calculated on a sliding scale as the property’s purchase price increases. The attorney who registers your bond will levy a charge, as will the conveyancing attorney, who is appointed by the seller, but paid by the buyer. If you have a good relationship with a conveyancing attorney, you may request to specify this person in the offer to purchase, though the seller has the right to decline this request.
The bank giving you the loan may charge initiation fees, and some mortgage brokers may charge for their services too. Avoid them if you can, or work to negotiate a better deal.
Timothy Akinnusi, head of sales and client value management at Nedbank, says that there are different loans available based on clients’ requirements.
“These can range from a client who is looking at buying an existing home, or a client who would like to build their home. An ordinary loan is used to purchase an established residential property, vacant land with approved plans, or to make improvements to an existing residential property,” he says. “A client must have an acceptable credit record, and the property they want to buy must be in good condition so it is acceptable as security against the loan.”
He explains that a building loan is used to finance a new home, cluster or sectional title unit, and that progress payments are made against completed building work, subject to inspections by the bank’s valuator.
“A client can take up this loan if they are extending or increasing the floor space of their existing home, subject to approved plans,” he says.
Most mortgages include an access facility, where clients can withdraw funds from their mortgages, ideally to improve the property. If they want to improve the property and there are not sufficient funds in the access facility, there are products available to help them do so.
“Consumers may apply for a further loan or re-advance to finance home improvements,” says Akinnusi. “A further loan differs from a re-advance in that the consumer will incur attorney costs in registering the further loan over their property, whereas there are no attorney costs associated with a re-advance, as the client is only able to access the difference between their current balance and their initial total registered amount.”
Many banks offer a “One” format account, such as the Absa Private One, which is a mortgage finance product that allows for more than one property to be added to a single loan account, combining the features of a transaction account with a mortgage to create a structured mortgage facility.
“Aside from the convenience, this facility automatically sweeps unused money from your transactional component into the loan, in order to reduce the total amount of interest charged,” says Ewald Kellerman, head of customer interaction at Absa Home Loans.
“For customers with up to 10 properties, who need more flexibility, another structured mortgage product is available called the Universal One. This product allows you to be qualified for a single limit at a single rate, and create multiple ‘pockets’ for specific purposes. These pockets have their own statements and can be used by investors to structure their tax affairs in such a way as to keep this separate from non-tax deductible lending.”
Regardless of the mortgage package you choose — or qualify for — the principles are simple: clean up your credit record — and keep it clean by ensuring you can afford what you want to buy, so you’re not disappointed or frustrated by the mortgage process.
Know your rights and responsibilities through the process, and find an expert you trust to hold your hand throughout the process, to minimise stress during what should be a joyous and exciting time of your life.