Purchasing a home is probably the single biggest investment you will make says CEO of SA Home Loans, Kevin Penwarden.
JOHANNESBURG - Purchasing a home is probably the single biggest investment you will make says CEO of SA Home Loans, Kevin Penwarden. Yet many potential new homeowners base their decision to buy a home solely on their ability to afford their bond repayments. But here’s the thing, the cost of owning a home is not just the price tag. There are other untold costs that affect your ability to afford this investment.
So what costs should you, as a potential home buyer, be aware of?
Once-off Initial Costs
1. Deposit: 10%
Many times, in order to secure a home loan, the bank or mortgage lender will require a deposit. Head of Sales and Customer Management at Nedbank Homeloans, Timothy Akinnusi advises buyers to consider saving between 10%-20% of the loan amount that you require.
The bigger the deposit, the less money you need to borrow and repay.
2. Bond Registration and Transfer Costs
You have finally made an offer on the perfect home, paid your deposit, it has been accepted and the bank has approved your loan. Next step is paying the registration costs to register the home in your name. If you are purchasing an existing property your costs will include transfer duty and fees.
The bond registration process will involve a number of parties: the seller, buyer, estate agent, transfer attorney, a bond and cancellation attorney which could be one attorney overseeing all the responsibility.
The process can take up to 6 weeks and the amount depends on the home loan amount.
The bond registration involves paying for the conveyance cost, postage & sundries including deeds office registry fee.
Source: First National Bank – www.fnb.co.za
Source: SARS - www.sars.gov.za
The property transfer includes paying the transfer duty which is a government tax to the property title. If the seller is a VAT vendor, no transfer duty is due as the purchase price includes VAT. What’s great is that you do not need to pay Transfer Duty for properties with a selling price up to R750 000.
Akinnusi says that the transfer duty and conveyancing fees are “normally payable by the buyer. He says buyers should budget 5%-8% of the value of the property.”
Here’s a table of approximate basic costs to give you an idea of what to expect (Incl. VAT). pic.twitter.com/gmV58kWe2u— SA Home Loans (@SAHomeLoans) March 16, 2016
3. Home loan initiation fee (once-off): R5700
Even before your home loan is approved, the bank may charge a home loan initiation fee to process the loan application. This amount is payable even if the application is rejected. The Usury Act regulates this fee. Different banks have different formulas. “Budget for R5700 required as a once off cost and [this cost] can be included in the cost of the loan,” says Akinnusi.
ON-GOING MONTHLY COSTS
You are responsible to these monthly payments from the commencement and length of the loan agreement which can be 10 to 30 years, depending on the bank.
1. Bond cost (ongoing)
The loan agreement that you enter into with the bank or mortgage lender will require monthly instalments from you. The monthly instalments are a combination of the amount stipulated to repay the home loan, known as a bond.
2. Bond Administration Fees (ongoing)
It will also be in your best interest to budget for ongoing administration fee. This is what the bank charges you monthly for administering the bond account and varies with each bank.
As regulated by the National Credit Act, the big banks will charge the new maximum monthly administration fee of R60 excluding VAT on credit entered into after 6 May 2016.
3. Interest rate (ongoing)
In addition to repaying your loan, you will have to pay the interest on that loan to thank the bank for lending you the money.
“The most important factor that influences your repayment is the interest rate on your home loan. Interest rate increases mean that you will pay a higher monthly home loan instalment. Obviously, you will also benefit from reduced home loan repayments when interest rates decrease,” says CEO SA Home Loans, Kevin Penwarden.
In this case, the important decision you need to make is whether to choose a fixed or variable interest rate on your home loan agreement.
Interest rates change over time and your monthly instalments may rise or drop as a result. You would need to know beforehand whether you can cope with future increases in interest rates advises Penwarden.
So what is the difference between variable and fixed interest rate?
Variable interest rate
The standard rate taken by home loan clients is the variable interest rate. This rate is in line with the prime lending rate and changes as the prime lending rate changes. The prime lending rate is 10.5%. Most home loan clients pay prime or prime plus one percent of the money borrowed.
Fixed interest rate
If you opt for a fixed interest rate then the instalment you pay on the remaining balance will not go up or down as the prime lending rate goes up or down during the period of the loan.
The maximum the bank can charge you on a property loan is regulated by the National Credit Act. The maximum interest rate on home loans is capped at the Repo rate plus 12% per year. The repo rate is currently set at 7% by the South African Reserve Bank. So, you cannot be charged more than 19% per year.
“Fixing interest rates is one way of creating a more stable monthly cash flow and is ideal for people entering the market for the first time and for those buying in the ‘affordable housing’ range, which is up to R600 000,” says Marius Marais, chief executive of housing finance at First National Bank (FNB) in an interview with IOL.
4. Home Insurance (ongoing)
The next monthly debit order is insurance.
“You will also require home owner&39;s insurance that covers the building and other permanent fixtures, such as your geyser, against damage or loss. It is also advisable to set aside some funds for regular maintenance and repairs,” says SA Home Loans’ CEO.
This is to protect the financial investment in the property against damage from accidents, natural disasters like flood, fire or storm and other hazards such as vandalism, riot or impact by animals, vehicles, aircraft or falling trees for both the bank and you, the home loan client.
Penwarden advises that without proper insurance, unexpected property expenses could put a strain on your finances.
The amount of cover the bank may insist will vary depending on the value of your property and the bank. Nedbank’s Akinnusi says at Nedbank, choosing to insure your property with the bank that has given you a home loan will result cheaper services fees than if you insured it with an external insurer.
5. Life Assurance (ongoing)
The bank may also insist that you take out a Life Assurance policy, if you do not already have one. This will cover the outstanding debt in the event of your retrenchment, disability and death. It will also mean that the bank will have first dibs on your life assurance pay-out. The amount the bank takes will depend on the unsettled balance of your home loan.
You have the right to choose your desired insurance company.
In an interview with IOL, Praven Subbramoney, Head of Product and Sales at First National Bank (FNB) says that banks also offer credit life cover and homeowner insurance from a preferred insurer, “one of the benefits of taking out cover from your bank’s preferred insurer is that the sum insured is based on the outstanding balance, which only your bank has sight of. There’s nothing stopping you from notifying your own insurer of your outstanding balance, but you can easily forget to do this and find that you are under-insured if you have dipped into your home loan, for example.”
6. Rates, taxes and levies
Many first time buyers do not consider rates, taxes and levies. “Rates will be payable to the municipality and, if you live in a complex or estate, you will have to contribute towards a monthly levy,” advises CEO of SA Home Loans, Penwarden. These could cost anything from zero to more than R4000 per month over and above your monthly bond repayment.
Every home needs electricity and water. Unfortunately, these do not come free. Your monthly budget must include fixed or prepaid payments to your local water and electricity utility to keep the lights on and the water running in your home.
Finally you know the truth that buying a home isn’t as simple as saving your deposit and waiting to hear whether your bond has been approved.
The real financial challenge is making sure you have enough cash to pay for all the costs that come with the investment. It’s wise to know that the deposit you’ve saved is just part of the cost of buying.
Given all these cost, would buying on auction be cheaper?
Akinnusi doesn’t think so. “Properties on auction are perceived to be cheaper, the truth is an auction is not an avenue just for distressed sales but is also a platform for selling private properties for private sellers, companies and consortiums. Depending on the type of auction, the costs, deposit rules, and process differ. In all cases, education about the auction process and costs is key for potential buyers,” says the banker.
In addition to bond repayments, homeownership comes with many expenses and to avoid financial pressure, these costs should be considered from the outset.
For questions or comments, please tweet us @eNCA and @MissMahlo.
Contributor: Mobile Journalist, Mashokane Mahlo