Do the maths before applying for a bond

PF 15Feb FNB update IOL PF Illustration: Colin Daniel

Applying for a home loan can be daunting even if you’ve been through the process before. This is partly because the banks’ lending criteria change in line with fluctuating market conditions. So it helps to be prepared.

Your first step is to draw up an accurate household budget. If you don’t have a handle on how you’re spending your money, you will only be able to guess how much you can afford to spend on home loan repayments. This could result in you wasting your time looking for a property that you cannot afford.

When it comes to applying for a home loan, your income and expenditure statement – if filled out properly – will reveal how much you can actually afford. This could result in your application being rejected on the basis that you cannot afford the repayments on the property you want.

Calculators

Most of the banks have online calculators to help you determine the maximum home loan for which you could qualify. These calculators merely give you a gauge and rely on you knowing offhand your total monthly expenses. You type in your gross income and your total monthly expenses and the calculator churns out a figure, based on a 20-year loan term and the current prime rate.

Only Nedbank’s calculator prompts you to itemise your monthly expenses – from other debt, such as repayments on other properties you may own and vehicle debt, credit card and personal loan debt, retail debt and insurance to medical scheme and gym fees (among other expenses), to indicate how much you’re actually spending each month.

Monde Motha, channel manager for FNB Homeloans Asset Finance, says that, “as a guideline”, you shouldn’t be looking to spend more than 30 percent of your after-tax income on home loan repayments.

Knowing your actual cost of living before you apply for a home loan is as important as knowing the state of your credit record.

Your credit record is like your financial CV, except you don’t write it or keep it. It’s “written” by your creditors and held by numerous credit bureaus. It records your exposure to credit, your payment profile – that is, how you conduct your affairs as a consumer of credit – and any adverse information, including judgments by creditors and sequestration and liquidation orders. The National Credit Act (NCA) prescribes how long this information can be kept on your record.

When you apply for a home loan, the bank will automatically draw your credit report as part of its assessment of your finances. For this reason, it’s important that you have already checked it to make sure that the information on record is accurate and that old data has been removed. You are entitled to one free credit report a year from each of the big credit bureaus (Compuscan, Experian, TransUnion and XDS).

“Your credit record needs to be favourable,” Motha says.

Steven Barker, head of home loans at Standard Bank, agrees. “Credit history plays a major part in the bank’s affordability assessment process.”

Affordability

The affordability assessment is the crux of the application process. In addition to your identity document and proof of address, if you’re a salaried employee, Barker says the bank or lender will need:

* Your most recent salary slip to verify your income;

* Bank statements for three months prior to your application – to verify the consistency of salary into the transactional account and to check how you have conducted your account; and

* A detailed breakdown of your income and expenses.

If you’re self-employed, you will need all of the above, plus your latest audited management accounts and financial statements so that the bank can assess your turnover, stability and cash flow.

Motha says it is also necessary for self-employed applicants to provide a statement of personal assets and liabilities so that the bank can assess your net worth and all financial commitments.

Deposit

Motha says that in order to qualify for a home loan, a bank may require a deposit of between 10 and 20 percent of the property price.

“Even if it is not required, it is advisable to put down as big a deposit as possible, because it allows the bank to reduce its risk and your interest rate,” he says.

Costs

In addition to putting down a deposit, you need to make provision for the costs associated with buying property. These can be hefty and can amount to about eight percent of the purchase price, Barker says. The big costs include transfer duty, bond initiation and bond registration fees, pro rata municipal rates and occupational rent.

You don’t pay transfer duty on properties with a value of up to R600 000. On a property of between R600 000 and R1 million, transfer duty is three percent of the value above R600 000. So, on a property of R900 000, transfer duty would be R9 000. On properties of R1 000 001 to R1.5 million, you pay R12 000 plus five percent of the value above R1 million. And on properties of R1 500 001 and more, you pay R37 000 plus eight percent of the value exceeding R1.5 million.

You don’t pay transfer duty if you buy from a registered VAT vendor and the sale is part of the seller’s normal business activities – for example, if you buy from a developer.

A bond initiation fee of R5 700 (the maximum fee as prescribed by the NCA), which the bank charges you, and bond registration fees, which you pay to the bond attorney, are also for your account. To lure clients, banks sometimes reduce or waive bond registration fees.

You may also be required to pay municipal rates upfront. Most municipalities ask for between four and six months’ rates upfront. You will also be required to pay for a rates clearance certificate.

Another big expense to budget for is occupational rent. Depending on the timing of the transfer, you may need to take occupation of your new home before it belongs to you, in which case you’ll be liable for occupational rent. You will need to make provision for that in your budget.

Property valuation

When you apply for a home loan, the bank will value the property you want to buy. The cost of the valuation is included in the initiation fee. The bank sends one of its valuers to check that there is adequate value in the property – or how much security it offers the bank.

Valuers will conduct a market analysis to assign a realistic value to the property, by comparing it to similar properties in the area that have sold recently. If, for example, the seller is asking for R1.5 million, but the property is valued at only R1 million, your bank would decline an application for a loan of R1.3 million.

Motha says you are not entitled to the valuation report, though your bank may give you the valuation certificate, which shows the market value of the property, according to the bank’s valuers.

Bond pre-approval

The purpose of “pre-approving” a home loan is to provide you with an idea of what you can afford to buy.

The information you provide to obtain “pre-approval” or an “approval in principal” is usually based on your income and expenses, but it is not verified by the bank or lender, so it is not a guarantee that you will be given a loan for the “pre-approved” amount, Motha says.

For this reason, don’t rely on pre-approval. In effect, there’s no such thing.

THE TRANSFER AND BOND REGISTRATION PROCESS

Once your home loan has been approved, the process that results in the registration of your mortgage bond with the Deeds Office can take up to three months. Monde Motha, channel manager for First National Bank Homeloans Asset Finance, says this process usually requires “little involvement” from you. Nevertheless, if you understand the process, it’s easier to manage your expectations.

* The bank will instruct the bond attorney to register the mortgage bond in the Deeds Office.

* The seller, or the seller’s appointed representative (such as an estate agent), advises the transferring attorney (also known as the conveyancer) to transfer the property into your name.

* Where a bond is registered over the property being sold, the conveyancer calls for the title deed and cancellation figures (the amount still owing by the seller) from the bank that holds the bond.

* The conveyancer also asks for a rates clearance certificate for the property from the local authority/municipality, and for a tax clearance certificate from the South African Revenue Service (SARS) to check that money is not owed to SARS.

* The bond attorney contacts the conveyancer and advises him or her of the amount available for guarantees (from your bank to ensure that the money being lent to you is available on the date of registration of the bond) and requests the draft transfer deed.

* The conveyancer asks the bond cancellation attorney (appointed by the bank that holds the bond) to cancel the seller’s bond on receipt of a guarantee for the outstanding amount.

* Once the conveyancer has |received the title deed and cancellation figures, you and the seller sign the |transfer documents.

* You pay the transfer costs to the conveyancer.

* The bond attorney prepares the bond documentation. You sign the papers and pay the bond registration costs.

* The bond attorney and the conveyancer lodge the transfer and bond documents at the Deeds Office simultaneously.

* The Deeds Office receives all the documentation and verifies it prior to permitting registration.

* The attorneys advise when the bond is on preparation (prep). This means the bond will register within one to three days.

* Transfer and registration take place.

* The bank and/or attorney inform you on registration of your loan.

* The bank pays out the loan on the date of registration.

* The bank advises you of the details of your monthly repayment.

* The attorney forwards the title deed and bond document to the bank to keep as security.

BUYING SECTIONAL TITLE

If you intend to buy a sectional title property, it is essential to find out and understand the financial standing of the sectional title scheme’s body corporate before you submit an offer, Steven Barker, head of home loans at Standard Bank, warns.

A scheme that is highly indebted may impose steep levy increases and/or special levies, which will eat into your budget and negatively affect the value of your property, he says.

And if you do buy into a sectional title scheme, you should be an active member of the body corporate, because decisions are made at annual and special general meetings that can significantly affect your pocket and your property.

DID YOU KNOW?

The average house price in 2013 was R911 322, according to mortgage bond originator ooba.

In December last year, the average amount of a bond originated by ooba was R793 931, and the average deposit paid was 15 percent of the purchase price, or R139 500. In the case of first-time home-buyers, the average bond was R627 021.

Ooba says it has an approval rate of 65 percent, or “more than seven out of every 10 home loan applications it receives”.


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