FIRST TIME BUYER'S GUIDE TO HOME OWNERSHIP

24 Nov 2016

 
Becoming a homeowner for the first time is a very exciting event, but it may come with many questions and procedures that are unfamiliar to first time homeowners. Hopefully after reading this you will have a better understanding of what to expect and how to go about buying your home.

Source: http://www.sahomeloans.com/Articles/FirstTimeBuyersGuideToHomeOwnership

Becoming a homeowner for the first time is a very exciting event, but it may come with many questions and procedures that are unfamiliar to first time homeowners. Hopefully after reading this you will have a better understanding of what to expect and how to go about buying your home.

Plan Ahead for Success

Before setting out to buy a home, it pays to think about your needs. Often one may fall in love with "the perfect house" only to find that the home is not in the right area or that the garden is too big to manage. If the home is for a family, the needs of the whole family must be considered - husband, wife, children, and sometimes even grandparents. Think about how many bedrooms and what size kitchen is needed; and whether having a garage is important. Do you have a dog and need the property to be fully fenced?

Very few people have the money to buy exactly what they want, so make a list of your requirements and break it down into "must have" and "like to have". It will help you when you start looking at homes. Then think about the area where you want to live - is it quick and easy to get to work? Are there schools and shops nearby?

Monthly expenses need to be carefully budgeted before you even start looking. Owning a home not only means paying a monthly bond installment but has many new bills too. Make a list of everything you'll have to pay - bond installment, rates or levies, house insurance, mortgage (bond) protection insurance, electricity and water, repairs and maintenance; and make sure your budget can afford everything you have listed.

Checklist Must Have:

Please see our available Checklists for Buying and Moving Home

What is a Mortgage Loan?

The various names can make this quite confusing. The correct name for a loan over a property is a Mortgage Loan. The word "mortgage" means to "pledge" or "promise" something. In other words when you take out a mortgage loan you "promise" your property as security to the lender in case you cannot pay back the loan. The Mortgage Bond is the document that you sign that contains this promise. The terms "mortgage" and "bond" therefore usually mean the same, and are used interchangeably.

When you buy a property and get a loan with a mortgage lender, the house is yours. It is registered in your name and you are fully responsible for it.

How Much Will I be Able to Borrow?

Affordability: this is the big question every homeowner to be wants answered. As a guideline, your installment should not be more than 25% - 30% of your regular family income, before tax and deductions. If you have your own business or earn regular overtime or sales commission, the various lenders will each have their own formula for calculating what they consider as regular income. You will need to provide some proof of earnings.

For a family where both husband and wife work, the calculation might be something like this:

At a 30% installment to income, this family should be able to afford a repayment of R9 400 per month, which would mean their maximum loan would be R800 000 based on an interest rate of 13% p.a.

This table gives you the indicative maximum loan amounts and installments for other income levels.

Gross Monthly - Income Maximum - Installment Maximum Loan
R12 000 - R3 600 - R305 000
R18 000 - R5 400 - R460 000
R26 000 - R7 800 - R660 000
R40 000 - R12 000 - R1m
R60 000 - R18 000 - R1.5m
This table is based on an interest rate of 13% pa - if the interest rate is lower, you can afford a higher bond, and vice-versa. Note that this is only a rough guide; a responsible lender needs to look specifically at the unique affordability issues for each borrower.

Responsible credit lenders will therefore take a broader view of the affordability of each borrower into consideration. To do this, they will look at the Household Income compared to the Household Expenditure of the applicant(s) - including all current debt repayment commitments.

If you would like to know with more certainty what you will be able to borrow, you can apply to the lender for provisional credit approval before you buy - this is known as a pre-approval. Then you will have a much better idea of what price property you can afford.

You can look at our easy-to-use Loan Calculators to see what you can afford and what the monthly installment would cost.

Types of Home Ownership in South Africa

Most properties in South Africa are sold either as "freehold", "sectional title", "99-year leasehold" or "Share block".

Freehold

Simply put, freehold means that you own a piece of land and everything on it. You will be required to pay rates to the municipality based on the value of the land and buildings.

Sectional Title

Properties such as townhouses and flats are usually registered under "sectional title". In this case you own the "inside" of the house only, up to and including the ceiling. The outside of the house, the land on which it is built, as well as boundary walls, the roof, outbuildings and the like are owned by the "Body Corporate" (which is made up of all the owners of the individual units) on behalf of the individual owners.

In a sectional title development, the expenses of the Body Corporate are passed on to the individual section owners in the form of a compulsory levy. This includes municipal rates, building insurance on the whole complex, repairs and maintenance, communal water and electricity, accounting fees etc. So you need to budget for the monthly levy in addition to your home Loan re-payments. As from July 2008 Sectional Title units are separately rated and you will receive your own account from the Municipality.

Before buying into a sectional title complex, it's essential to check the latest financial accounts of the Body Corporate to make sure it‘s financially sound and that the House rules imposed by the Body Corporate are reasonable and in line with the Sectional Title Scheme rules.

99-Year Leasehold

Where a property is built on 99-year leasehold land, the homeowner never owns the land outright. The plot is on lease to the owner for a period of 99 years. If you are buying leasehold land from an existing owner and the real owner is not government or a municipality, you will buy what is left in years on the lease. In the case where the government is the owner of the land, the 99 year period begins afresh with every change of ownership of the leasehold. The land remains the property of the lessor, usually the government or a municipality.

Share Block

Share block is another form of property ownership, which typically applies only to a small number of blocks of flats. In this case the whole property is registered in the name of a company. The Purchaser becomes a shareholder in the company, and in terms of a "User Agreement" is entitled to occupy a particular flat (unit) and "proof of ownership" is a share certificate instead of a title deed. Expenses of the share block company will be divided among the shareholders in the same way as a sectional title. Before buying into a share block, it's essential to get an accountant to check the latest financial accounts and balance sheet to make sure it's financially sound. However, be warned: typically no bank or financial institution will grant a mortgage loan where the property is held through a share block scheme.

Title Deeds

Whether the property is a freehold, sectional title or leasehold, it has a "Title Deed", a document which identifies the location and size of the property as well as the particulars of the owner. Every time the property changes hands this document must be presented to the Deeds Office in that region, and a new title deed issued in the name of the new owner. This process is done by Attorneys who are qualified as Conveyancers and who specialize in Property Law.

The Costs of Buying a Home

As well as the purchase price, there are a number of other big expenses when you buy a home. Transfer Duty and the transfer costs may be your biggest expense in purchasing your property. Transfer Duty is paid to South African Revenue Service every time a property changes hands. No transfer duty is payable in respect of a new purchase from a Developer. The purchase price includes VAT which is payable by the Developer. For all other purchases, duty is calculated according to the purchase price of the house. If the home is bought for R750 000 or less, no transfer duty is payable. This value is reviewed periodically by the Minister of Finance.

If you take out a loan to buy your home, there is also the cost of registering the Mortgage Bond. This is the document confirming the mortgage which registered in the Deeds Office. There are also other smaller costs that you may need to allow for e.g. the lender's administration fee. Be sure to ask your lender for a breakdown of all the costs you will be expected to pay.

Here is a table of approximate basic costs to give you an idea of what to expect (incl. VAT): These amounts may differ from Attorney to Attorney. * Duties, costs and fees mentioned below are as at 1st April 2016.

Purchase Price - Transfer Duty - Transfer Costs - Registration
R520 000 - R15 129 - R9 153
R750 000 - R18 313 - R11 151
R1 000 000 - R7 500 - R21 387 - R13 594
R1 650 000 - R39 000 - R26 684 - R16 262
R2 000 000 - R65 000 - R28 907 - R18 420
R2 500 000 - R112 500 - R32 822 - R20 643
There are also other smaller, variable costs to be added e.g. FICA fees, Electronic Instruction fees, Posts and Petties and any other fees and disbursements. These amounts may differ from Attorney to Attorney and from transaction to transaction. Typically these may total about R2 000.

Interest Rates

The mortgage lenders standard home loan offers a variable interest rate loan based on the "repo rate" determined by the SA Reserve Bank. This means that the rate will rise and fall along with economic conditions in this country. Some mortgage lenders also offer short term fixed rates where the rate is agreed and remains at that level for up to five years.

In first world terms, rates in South Africa are relatively high, so the interest paid on a 20-year home loan is typically more than the price of the house itself. It makes sense to find the very best deal as every percent reduction in the interest rate creates a huge saving over 20 years. If you can put down a bigger deposit on the property you should be able to negotiate a lower rate.

Interest is calculated on the amount owing on the loan on a daily basis and is added monthly to the outstanding balance. Your loan will be repaid over 20 years, that is, 240 monthly installments. However you can make additional payments into your home loan, or pay more than your required monthly installments thus reducing the time period of paying off your home loan. This will dramatically reduce the total amount of interest paid on the loan over its life.

Choosing a home

A good way to start is to get a pre-approval home loan document from a mortgage lender to see what loan, and hence what value home you qualify for. You now have an idea of what price range to look at and you can do this in the property section of the newspapers and see what homes are being advertised by the estate agents. When someone decides to sell their home, they normally appoint an estate agent to sell it for them.

Using the estate agent's as an intermediary, they agree on a market price and the property is advertised. It is the estate agent's role to bring together the seller and the buyer, and finalise the sale. If this is successful, the seller pays the estate agent a commission from the sale proceeds. The buyer is not required to contribute to the estate agent's fees.

An estate agent will discuss your requirements and arrange to show you properties that match your needs and price range. The price is normally negotiable and buyers seldom pay the full asking price. The estate agent will present your offer to the seller and allow him or her to decide whether they find your offer acceptable or not. It's always a good idea to have the property checked out for any defects by a company specialising in home inspections. The ordinary man-in-the-street will not usually have the expertise to recognise structural problems or major defects if they are not obvious, or if they have been disguised.

Putting in an Offer to Purchase

Once you have seen a property you like, the estate agent will help you draw up an "Offer to Purchase". This document contains all the terms and conditions of the sale, the purchase price, the payment terms, the date you will take occupation of the property, and the occupational rent. Occupational rent is a monthly amount paid to the seller by the purchaser to occupy the property prior to the date of registration of transfer of the property into the name of the purchaser. Alternatively occupational rent could be paid by the seller to the purchaser if he/she needs to continue occupying the property for a period after registration of transfer. An estate agent can assist the parties in reaching an agreement in this regard. It is always advisable to have an Attorney check the contract prior to signing as this can prevent problems at a later stage.

If you plan to take out a home loan, the "Offer to Purchase" must include a condition that the sale is subject to bond approval being obtained within a realistic amount of time i.e. 7 – 10 working days. Once you have confirmation that your loan has been approved, you must notify the estate agent immediately to ensure that your offer becomes unconditional and to enable the process to continue. This condition is very important, because if you are not able to secure finance, the "Offer to Purchase" will terminate and become null in void, and neither you nor the buyer will be liable to pay any costs or penalties.

The Offer to Purchase should also include details of any unusual fixtures or fittings which are included in the purchase price, or which the seller might want to take with him when he leaves. Generally all items which are "fixed" remain in the house, but furniture, loose carpets and appliances go with the seller. This is where conflicts often arise, so it's best to ensure any important items are noted in the contract.

Take the time to find out everything you need to know about a property before signing anything. Visit the house for a second look – you may have missed something the first time. Always express your concerns to the estate agent and ask them to assist you in clarifying any problem areas that you may have or consult an Attorney. Once the seller has accepted and signed the offer, it becomes a contract binding on both parties. However, if the purchase price is R250 000 or less, the buyer has the right to cancel the offer within 5 days of signing the Offer to Purchase. This must be confirmed by the buyer giving written notice to the seller and the sellers' agent within those 5 days.

Applying for a Home Loan

Immediately after you have signed the contract, make your application for a home loan.

When you are buying a home, financing your new home is one of life‘s major investment decisions. At SA Home Loans we understand that the mortgage you choose is a long term relationship, no matter how your circumstances change. This is why we study your lifestyle, discuss your plans and ambitions and design a loan that will meet not only your immediate needs but allow for the future. For example, we understand the worries and the needs facing first time home buyers. First-time home buyers can get a great deal when they select SA Home Loans for their home financing, because we don't penalise you for being a new home buyer.

Why not deal directly with SA Home Loans - the mortgage specialists? When you purchase a new home it is likely that the estate agent will put you into contact with their preferred mortgage originator (in return for a handsome commission). Mortgage originators are not finance providers, but broker a home loan from one of the financial institutions. But ultimately you are still in control – you can cut out the middleman and shop around to choose whichever mortgage lender you prefer.

A reputable lender, such as SA Home Loans, will help you with the application, explain everything you need to know, advise you how much you need for costs, and confirm your likely monthly installment.

They will ask you for your identification, your latest payslip, bank statements, proof of any housing subsidy, and a copy of the sale agreement. All mortgage lenders will do a credit check on you to ensure you have an acceptable credit record.

The lender will also assign an independent valuer to assess your property. This is to ensure that the loan amount that has been requested is supported by the value of the property.

Be sure to disclose your true state of affairs in your loan application, to enable lender to make a fair assessment to determine whether you will be able to afford your loan repayments. Note that all Lenders are obliged to comply with the terms of the National Credit Act.

The lender will also insist that you take out insurance on your building and any additions such as walls, paving and outbuildings etc. so that you are covered in the event of a fire, flood, damage or any other major disaster. The insurance premium can be added into your monthly loan installment. In most cases for sectional title properties, this will not be necessary, as your insurance will be included in your levy and payable to your Body Corporate.

You may also be encouraged to take out mortgage protection cover to protect your family and your home, in the event of the death or disability of the major bread winner. This is a very practical cover that protects your home and your family, as the insurance will settle your outstanding loan should you die or become disabled.

Taking Ownership of Your New Home

Once all the conditions of the contract have been met and the deposit paid, the next process is the transfer of the property into your name and the registration of the Mortgage Bond at the Deeds Office. The Conveyancing Attorneys handle this part of the loan process and will contact you when the documents are ready to be signed.

The seller will also have to provide you with an Electrical Clearance Certificate, as well as a document stating that the property is pest-free. These conditions may vary depending on which province your property is situated in.

The registration and transfer process normally takes between 8-10 weeks if there are no unexpected delays.

The day the transfer is registered in the Deeds Office is the day you become the legal owner of the property. Your lender will start the insurance policy and begin charging interest on the loan and will inform you when the first installment becomes payable. From this date onwards you are also responsible for paying rates and levies (or earlier, depending on conditions of sale agreement).

Important Payment Information

Make sure your monthly home loan installments, rates and taxes are kept up to date at all times. If you should find yourself in financial difficulty at any time during your loan term, instead of ignoring your dilemma, rather speak to your mortgage lender and municipality about this, as a responsible lender such as SA Home Loans will do everything they can to help you through difficult times. Both the municipality and the mortgage lender may as a last resort be forced to sell the property should you continually default on payment.

In most municipalities rates and utility accounts are payable on a monthly basis. However, in the Cape it is common to have to pay rates yearly in advance.

Service Excellence is a Top Priority

When choosing the lender / financier for your home, don't forget this is a long-term relationship and you want to be absolutely confident that the company you deal with will serve you well for the whole life of your loans. How will you be treated if you do fall behind on your loan repayments? What service will you receive if you need to apply for a re-advance or further loan? Do you prefer to deal with your lender via a branch or over the telephone? How sure are you that the discount rate you receive today will not be increased if your circumstances change? Beware of the fine print. Be sure to choose a lender that prides itself on a transparent pricing policy and has a strong focus on client service excellence.