Rental income and income tax – how does it work?

By Veruska De Vita

The ability to earn a passive income through property is a wonderful opportunity that can add significantly to your monthly monetary needs. A rental property that is well-positioned, in demand and well maintained is an excellent asset and a sound investment. But in terms of rental income and income tax, how exactly does it work?

Craig Hutchison, CEO of Engel & Völkers Southern Africa explains that if you rent out a property and receive a rental income, it will be subject to tax.

“Rent received from the letting of residential accommodation such as a holiday home, cottage on your property, sub-renting part of your house or a townhouse will all be subject to being taxed. The rental income is added to any other taxable income you receive, such as a monthly salary,” explains Hutchison.

 Can the taxable income be reduced?

Yes, the taxable income accrued from renting out a property can be reduced as expenses are always incurred.

Expenses that may be deducted from rental income include:

  • Bond interest
  • Rates and taxes
  • Property levies
  • Estate agency fees
  • Homeowners insurance (excludes household contents insurance)
  • Garden services
  • Repairs
  • Security

Which expenses are not allowed?

It must be noted that only expenses related to the rental of the property may be deducted. Capital and private expenses won’t be considered as a deduction by SARS.

“While maintenance and repairs expenses can be passed, improvement costs are a capital expense and will be included in the base cost of the property. When the property is sold, the improvement costs will be an expense that will effectively reduce the capital gain, thus reducing the capital gains tax payable to SARS,” explains Hutchison.

If expenses exceed rental income

There are times when, for one reason or another, the expenses accrued from leasing a property exceed the income. The loss should then be off-set against other income received by you the owner. When leasing out a property it is always best to consult with an accountant or tax specialist to fully understand what is deductible, how much tax will essentially be paid over the annual lease period and the like. This will provide a realistic view of your nett income.

“Income tax aside, the leasing of a residential property if managed effectively, is a viable and financially sound way of adding to your monthly income stream. At the same time, you are the owner of an asset that will appreciate in value over time and will pay dividends as the years go by,” concludes Hutchison.

How a well-designed Home can increase sales price

By Veruska De Vita

Have you ever wondered if contracting an experienced architect when building a new home or making additions to your existing property is worth the investment? A study by The Modern House shows that a home that is well-designed can increase the sales price by 12%.

The study reveals that design is a differentiator for home buyers and they are prepared to pay more for a home that has a pleasing aesthetic look and feel and that accentuates their lifestyle. So yes, good design does command a higher premium.

Craig Hutchison, CEO of Engel & Völkers Southern Africa, is in agreement.  “A well-planned design for your abode is well worth its weight in gold. Employing the services of a professional designer or an architect – with the experience relevant to your needs and lifestyle – will pay dividends in the long-term,” he explains.

Consumers are searching for tangible experiences and this spills over into their home space. “Not everyone has a good eye for spatial design so if they’re buying a home that has had the hand of a designer or an architect, this is a bonus for them as the finished product is basically on a plate. Most people don’t know where to start and what will look good, so if they walk into a show house with a strong aesthetic and spatial appeal, they’ll want it. The benefit is that the buyer doesn’t have to worry about doing it himself and risking that the end product is not quite what he had in mind.”

“Architecturally designed homes are most apparent in the high-end market, such as properties in Waterkloof (Pretoria) and in estates. It starts with one property owner and quickly becomes a trend, with others in the area also employing the services of a professional. Part of it is keeping up with the trendsetters, another is the fact that a well thought-out and beautifully planned home adds significantly to how space is maximised and utilized. This then creates an overall sense of comfort and visual appeal,” continues Hutchison.

According to architect Mark Gouws, the benefit of using an architect far outweighs the upfront investment. “An architect not only presents options that are tailormade to your taste and requirements, but also ensures a cost-effective project. An architect is knowledgeable on the best and most cost-efficient products available on the market, and knows how to plan within budget to ensure that the client gets the best value for money without skimping on quality fittings,” he says.

An architect will also make sure that plan approval with the authorities is a seamless process and includes getting the required compliance certificates.  “It takes time, money and effort to get compliance certificates but it is well worth it down the line. Rather ensure that your home fits with the regulations instead of having water damage problems in years to come, for example.”

Architects also understand how smart design can save you money, and as a result, increase the value of your home. “Passive energy design can make significant savings on your heating and cooling costs. You shouldn’t have to switch on the air-conditioning in Summer because your house is too hot. A house should be designed in such a way that it is comfortable throughout the year. This is where passive design energy principles come into the picture. For example, a creeper planted in front of a window will prevent too much heat entering an area, whilst in winter the leaves fall and allow more sunlight through,” explains Gouws.

A healthy house means healthy inhabitants.  A professional can help you design a home that considers both the health of the environment and the building. “Ventilation is extremely important. A house needs to act like a great big lung, so air needs to flow comfortably through it to ensure a constant circulation of clean air. The healthier the house, the healthier you are and the more you’ll get out of your investment,” says Gouws.

Building is a big investment, so it’s important to get the best value you can. Using an architect may seem like a luxury, but it can maximise your budget and open up new possibilities. Furthermore, in terms of lifestyle experience as well as sales price, these elements will only appreciate. “If you’re considering a renovation, making an addition or building a brand new home, getting a good architect and interior designer from the start will pay dividends later,” concludes Hutchison.

Diversifying your property portfolio

Diversification is a key wealth strategy, but what should consumers invest in? Should they hedge their Rands and invest overseas?  Or it is better to buy a number of properties costing under R1 million?  

Grant Wheeler, Director of Engel & Völkers Southern Africa, says property should always be a part of any balanced investment portfolio. Keeping the active versus passive, cash versus geared debates aside for the purposes of this discussion there should always be a stepped/progressive approach to investing in property. What follows is aimed at the Average Joe who has a steady job or income and has a lump sum available to invest.

Building a balanced investment portfolio made up of shares (listed and unlisted), ETFs, bonds, property stocks, physical property, etc. can essentially start anywhere. Usually at the beginning of any portfolio build liquidity is important. You are bound to make mistakes and will need to be adjusting your capital allocation constantly. A big property purchase for example is difficult to get out of if that lease you are relying on falls through, particularly if that lease underpinned the property value. Understanding the cash required as well as cash generating abilities of each investment type is crucial.

Once you’re ready to invest in property you’d want to step in gradually, test your decisions and make the necessary adjustments as soon as possible. This as with any investment can also mean taking a loss. Key here is to act quickly. If unit prices are tumbling in the project you have a rental unit in and the rentals are dropping as a result of the neighbourhood declining, get out, move on. Property cycles can last years, decades even. Don’t rely on things turning in order for your investment to be saved.

Looking for the right income generating rental unit can be daunting. It’s always a good idea to buy locally to start with. Buy in the neighbourhood you know and understand. Once you’ve cut your teeth on the rental unit around the corner you can think about venturing further afield. Here you might follow your child to the university they are attending and buy a student unit in close proximity to the university. You might then buy the unit you’ve been renting at the coast as you’ve experience just how busy the complex is and have seen the rentals appreciating year on year. Next you could buy the retirement unit to house your ageing parents. In other words whilst expanding, diversifying geographically, diversifying your product type, you are doing this with a well thought through reason. You are addressing a need you know exists.

Once you are confident and comfortable with your local rental returns you might want to invest in foreign markets. To be clear the main reason you’d invest off-shore is because you believe [1] the Rand will devalue against your target currency [2] the capital gain is equal to or better than the local market and [3] rental escalations and occupation levels will be better. A key consideration here is to determine the ease of investing, selling, and getting your money back. You will need a good understanding of the market as well as knowledge regarding tax and legal differences etc. Being on a different continent with potential time and language differences can add a level of complexity to the mixture.

Without a doubt whether investing locally or in foreign markets it would be crucial to engage with a property professional to help guide you through the process. Advice from the right professional can be invaluable. Choosing a global property group who are able to connect you with the right opportunities both nationally as well as internationally makes sense. The benefit of having a single point of contact for your property dealings will save you time, money and a lot of inevitable frustrations.

Bond and Transfer Fees explained

By Veruska De Vita

Whether looking to get onto the property ladder or buying that sprawling family home you’ve always longed for, purchasing property is one of the biggest undertakings and investments you will make in your lifetime. As such it is crucially important to understand everything in the purchase equation, especially the fees.

In a nutshell, over and above the actual cost of the property, a buyer needs to set aside money for bond origination costs, transfer fees and transfer duties. The bond repayment is made to the bank every month for the agreed upon period, transfer duty is a tax based on the value of the property and is paid to SARS, while the transfer fees cover the costs for transferring the property into the buyer’s name (the conveyancing fees) and for registering a bond.

“Once a bond has been granted and the buyer has accepted it, he or she will pay fees to register the bond and to transfer the property. The buyer will always be required to pay these fees, while transfer duty need only be paid if the property costs more than R900 000,” says Grant Wheeler, Director of Strategy and Expansion: Engel & Völkers Southern Africa.

How much are the fees?

“As a rule of thumb, the buyer should allow for between 8% and 10% of the amount of the purchase price for all the other costs involved in purchasing the property excluding a potential deposit. In addition to these expenses, buyers should also make provision for additional charges, which can include rates and clearance certificates and prospective taxes amongst others,” says Wheeler.

Bond registration costs

 Conveyancer’s Fee. The conveyancer’s fee for bond registration covers the service of getting the bond registered over the title deeds. The amount varies in relation to the home loan amount. While the fee is based on tariffs recommended by the Law Society, it may differ slightly from one law firm to another.

Examples:

  • On a bond of R 650 000.00 the fee is approximately R 8 400.00 excl. VAT.
  • On a bond of R 2 000 000.00 the fee is approximately R 16 560.00 excl. VAT.

There are also sundries to be paid. The amount is usually fixed and each law firm has its own rates. The average is R650.00 excl. V.A.T. per bond. The charge covers small things like posting documents to other conveyancers, the bank, the estate agent, the Deeds Office, to the buyer etc.

Attorney’s Fees are always subject to VAT being added.

Deeds Office Registry Fee. This fee is charged by the Deeds Office for the legal registration of the mortgage bond.

 As per the Deeds Office schedule of fees for 2018, the amount is fixed according to the amount of the home loan.

Home Loan R
(i) does not exceed R150 000 376,00
(ii) exceeds R150 000 but does not exceed R300 000 486,00
(iii) exceeds R300 000 but does not exceed R600 000 606,00
(iv) exceeds R600 000 but does not exceed R800 000 852,00
(v) exceeds R800 000 but does not exceed R1 000 000 978,00
(vi) exceeds R1000 000 but does not exceed R2 000 000 1 098,00
(vii) exceeds R2 000 000 but does not exceed R4 000 000 1 522,00
(viii) exceeds R4 000 000 but does not exceed R6 000 000 1 846,00
(ix) exceeds R6 000 000 but does not exceed R8 000 000 2 197,00
(x) exceeds R8 000 000 but does not exceed R10 000 000 2 568,00
(xi) exceeds R10 000 000 but does not exceed R15 000 000 3 057,00
(xii) exceeds R15 000 000 but does not exceed R20 000 000 3 671,00
(xiii) exceeds R20 000 000 but does not exceed R30 000 000 4 278,00
(xiv) exceeds R30 000 000 6 113,00

The transfer also needs to be registered with the Deeds office:

Purchase Price/ Value of Property (whichever is greatest) R
(i) does not exceed R100 000 36,00
(ii) exceeds R100 000 but does not exceed R200 000 78,00
(iii) exceeds R200 000 but does not exceed R300 000 486,00
(iv) exceeds R300 000 but does not exceed R600 000 606,00
(v) exceeds R600 000 but does not exceed R800 000 852,00
(vi) exceeds R800 000 but does not exceed R1 000 000 978,00
(vii) exceeds R1000 000 but does not exceed R2 000 000 1 098,00
(viii) exceeds R2 000 000 but does not exceed R4 000 000 1 522,00
(ix) exceeds R4 000 000 but does not exceed R6 000 000 1 846,00
(x) exceeds R6 000 000 but does not exceed R8 000 000 2 197,00
(xi) exceeds R8 000 000 but does not exceed R10 000 000 2 568,00
(xii) exceeds R10 000 000 but does not exceed R15 000 000 3 057,00
(xiii) exceeds R15 000 000 but does not exceed R20 000 000 3 671,00
(xiv) exceeds R20 000 000 4 890,00

Transfer Duty

Transfer duty is a tax that is payable to SARS and is based on the value (not the selling price) of a property.

Below are the transfer duty rates applicable on property purchased between 1 March 2018 to 28 February 2019:

Value of property Rate
0 – R900 000 0%
R900 001 – R1 250 000 3% of the value above R900 000
R1 250 001 – R1 750 000 R10 500 + 6% of the value above R 1 250 000
R1 750 001 – R2 250 000 R40 500 + 8% of the value above R 1 750 000
R2 250 001 – R10 000 000 R80 500 +11% of the value above R2 250 000
R10 000 001 and above ​R933 000 + 13% of the value above R10 000 000

Bond Initiation Fee

A Home Loan or Bond Initiation Fee is charged by the bank for the processing of the bond application. Some banks work on a base fee plus a percentage of the loan amount, other banks charge a flat rate of approximately R6037.00 (Incl. VAT).

“A reputable real estate company will assist buyers to understand the fees and expenses involved in the purchase of property. Ensure that you deal with a company that is professional and offers comprehensive advice, especially if you are a first time buyer,” concludes Wheeler.

Home loans – then and now

By Veruska De Vita

If you want to buy property, the good news is that banks are approving more home loans. The current stable-interest-rate lending environment coupled with slower growth in property prices means getting a bond for a home is notably more affordable now compared to 2017.

“The home loan approval rate is also the highest it has been in 10 years. One of the main reasons for this is that there is stronger competition amongst banks. This is beneficial to buyers as it means there is more opportunity to negotiating a home loan structure and lending rate that works in the your favour” says Gerrit Disberg, Director of Engel & Völkers Financial Services.

These days applying for a home loan is easier. Applications can be made through one mortgage originator who will then submit to all the major banks through their online system, no need for an individual to submit to each individual bank. In the past, the process of assessing a buyer in order to prove affordability was a painstaking and lengthy process. The method has changed significantly in the past decade.  People are making use of bond originators – originators provide a free bond application service through all the major banks on behalf of the buyer at no cost.  In essence, they are a broker between client and bank. It is the originator’s job to assist individuals to acquire the lowest possible home loan rate and to guide them through the process.

Bond origination companies are highly instrumental in the way in which the home loan origination process is handled. A good bond originator understands the landscape, they have experience and in-depth knowledge of the banks’ requirements and are familiar with lending criteria and legislation.

Why you should consider using Bond Originators

The services of a bond originator are beneficial as consumers no longer need to apply to each and every bank themselves in order to compare costs. Using an originator is the easiest, least expensive and most productive way of applying for a home loan. Only one set of forms is to be completed. Originators work electronically and banks are usually quick to process and respond to their applications.

“Primarily, an originator ensures that the buyer receives the lowest possible home loan rate, thus saving thousands of Rands over the bond repayment period. The client incurs no costs for the services, the bond originator then receives a fee from the bank once the loan application has been approved and processed” Disbergen concluded.

How to determine your return on an investment home

By Versuka de Vita

Owning properties can provide investors with steady rental income or capital appreciation when the property is sold for a profit. However, it is important to measure the return on investment (ROI) to determine the level of profitability of the property.

Before investing in a rental property, there are a number of key factors to take into account explains Craig Hutchison, CEO of Engel & Völkers Southern Africa. “Location and the future of the location is the first and foremost aspect to consider when purchasing an investment property that will result in capital appreciation. The next features to take stock of are fixtures and fittings. Are they durable and will you have high maintenance costs?”

“Thirdly,” says Hutchison, “establish if there is a demand for a particular property. Do your homework on the area and the types of properties that are in demand. It makes more strategic sense to invest in a two-bedroom unit instead of a three-bedroom house, if the demand for the former is greater.”

Lastly, Hutchison recommends that buyers look at a five-year view to invest as a minimum time frame. Ten years is preferable as this will generate a more valuable return on investment, as this should give the best capital appreciation on a well located and maintained property.

Below is an outline of how to calculate ROI

 Cash Purchase

  • If an individual purchases a property outright with no bond, the profitability or ROI is calculated as follows:
  • If a property costs R1 million and the transfer costs (conveyancing fees, transfer duty, deeds office fee and V.A.T.) are R30 000, the total investment is R1,03 million
  • Rent collection every month is R10 000.

In 12 months’ time as an example:

  • R120 000 in rental income is earned
  • However, there are expenses including maintenance, property taxes, levies and insurance which could total R24 000 per year or R2 000 every month.
  • The annual return is R96 000 (R120 000 – R24 000) for the year
  • The capital appreciation of the property after selling costs has increased by 3% equaling R30 900 (R1 060 900 – R1 030 000)

To calculate the property’s ROI:

  • Divide the annual return (R96 000 + R30 900 = R126 900) by the amount of the total investment (R1, 03 million)
  • ROI = R126 900 ÷ R1,03 million = 0.123 or 12.3%
  • ROI is 12.3%

If the property is bonded, the profitability is worked out as follows:

  • On the same property for R1 million there will be added costs, including conveyancing fees, bond initiation costs, deeds office fee and V.A.T.
  • In addition to these costs, buyers should also make provision for additional charges, which can include rates and clearance certificates and prospective taxes amongst others. These costs amount to R30 000 resulting in the total cost being R1,03 million
  • A down payment of R230 000 is made and the remaining R800 000 is bonded on a 20-year loan with a fixed interest rate of 10%
  • The monthly principal and interest payment would be R7 17
  • Add R2 000 per month to cover maintenance, property taxes, levies and insurance, which equals R9 17 in expenses every month
  • With a rental income of R10 000 the owner would make R279.83 each month (rent minus bond repayment)

One year later:

  • The investor earns R120 000 in total rental income for the year at R10 000 per month.
  • The annual return is R3,357.96 (R279.83 x 12 months)
  • The capital appreciation of the property after selling costs has increased by 3%  R30 900 (1 060 900 – 1 030 000)

 To calculate the property’s ROI:

  • Divide the annual return by the original out-of-pocket expenses (the down payment of R230 000) to determine the ROI.
  • ROI: (R3,357.96 + R30 900) ÷ R230 000 = 0.15
  • The ROI is 15%

 Things to Consider

As demonstrated in the examples above, the ROI for a rental property is different depending on whether the property is financed via a home loan or paid for in cash. It is also important to bear in mind certain variables such as if the property is vacant and there is no rental income for a number of months or maintenance costs are higher than anticipated.

Real Estate & Cryptocurrency

Although Cryptocurrency has been around for quite some time now, it is still a relatively new concept in South Africa and, to a degree, quite foreign for some. The idea of no physical money and no set currency is quite daunting. There are quite a few options as an investment, but Bitcoin is perhaps the most well-known.

Bitcoin is a currency created in 2009 by the anonymous pseudonym ‘Satoshi Nakamoto’; in short it enables you to make financial transactions free of fees and the interference of banks. You can already use Bitcoin to buy everything from pizza to a manicure as well as a payment option on Takealot. But could virtual currencies become a standard trading resource to purchase real estate?

What is Bitcoin?

In short, Bitcoin has two key traits that define it: it is digital and it is seen as an alternative currency. Designed to be user friendly, there’s no need to have advanced technical knowledge to get a handle on how Bitcoin works. To get started with using it you simply install a Bitcoin wallet on your mobile phone or laptop. You’ll be given an address similar to an email, which you can use to send or receive money.

Potential impacts on the property market: Where could it come into play?

Cryptocurrency will have numerous implications on the property market both positive and negative.  “Will we soon be taking advantage of this emerging trend with clients buying property through Bitcoin, and will Bitcoin be seen as a potential replacement for paper- and coin-based money in the near future? If the answer is yes, then blockchain technology, which is the basis of cryptocurrency, and smart contracts will revolutionise the real estate industry,” says Craig Hutchison, CEO Engel & Völkers Southern Africa.

 Transaction time

One of the most obvious ways that Bitcoin is bound to have an impact on real estate is by providing new platforms for sales. Individual properties could have their own digital identity with a documented and verifiable chain of ownership. As the blockchain is decentralised, this information would be open, accessible and fully transparent. By passing the bank, buyers and sellers could potentially connect in real time, speeding up the process for transactions significantly.  “The electronic deeds system which is being implemented is the first step in this process” Craig added.

Transactional costs

With new online platforms, buyers and sellers can store their information securely and it would be instantly verifiable, which cuts out prolonged discussions with banks and lawyers and thereby saves money. Saving on transaction fees, Bitcoin lowers the transaction costs of transferring money from one party to another. Cryptocurrency will also make properties easier to sell to overseas buyers as it enables a legal transfer of property ownership using digital ledger technology.

Agent commission

As the trend increases to buy property with Bitcoin, real estate agencies and area agents who work predominantly with foreign buyers, will soon have to start thinking about accepting commission payments in the digital currency Bitcoin.

 Security

The blockchain still has a long way to go before it becomes a significant real estate market disruptor. Nonetheless, with encrypted data and a high level of security it could quickly become useful, particularly for transferring the large sums involved in luxury real estate. Blockchain technology creates a decentralised digital public record of transactions that is secure, anonymous and tamper-proof. This underlying technology is regarded by some major financial institutions as bullet-proof. The blockchain can be used to prevent fraud by creating a private, fully certifiable digital ID. This offers a more current and reliable proof of funds than a bank’s letter. Digital IDs secured by the blockchain’s digital ledger can be used for deed transfers, mortgage payments, or other financial scenarios.

 Tax

The exponential rise in the price of Bitcoin poses a threat to the South African Revenue Services’ (SARS) revenue collection efforts as it is largely dependent on traders’ own truthful declaration of profits. Financial institutions like banks are required to provide SARS with information on the investments of their clients for verification purposes, but in a crypto environment where such information is lacking, SARS may have to trust that a taxpayer made honest declarations with regard to crypto gains. SARS has said that it has plans to provide clarity on the tax implications.

Investing in property through Bitcoin

The Pros:

  • Sellers can receive direct bank deposit (takes 15 minutes to a day depending on network congestion) directly into his/her bank account from anywhere in the world, from any laptop or mobile device.
  • All transactions are private as Bitcoins are not linked to any names or addresses or any other private identifying information; it offers anonymity for both parties throughout the property transaction.
  • The ability to “hide” funds into assets.
  • There are no fees with Bitcoin. There is also no “margin” to convert the currency from one currency to another for international transactions as long as the seller can accept Bitcoins.
  • No third party is necessary once the self-enforcing smart mortgage contract is cryptographically signed.

The Cons:

  • Bitcoin’s are very volatile – value fluctuates every day.
  • Any and all activities related to the acquisition, trading or use of virtual currencies are performed at the user’s sole and independent risk and have no recourse to the bank.
  • Though each Bitcoin transaction is recorded in a public log, names of buyers and sellers are never revealed – only their wallet IDs. While that keeps Bitcoin users’ transactions private, it also lets them buy or sell anything without easily tracing it back to them.
  • Bitcoin transactions are not reversible. To reverse a transaction due to any litigation, you need both parties to be compliant.
  • You can’t buy a house with a mortgage bond with Bitcoin – all payments need to be made in full.

Will the bubble burst? 
Some dispute that it is too unstable to be seen as a currency and warn that a crash is inevitable. There have been numerous occasions where Bitcoin has seemed to be in a dilemma, however every time that warning bells have gone off because the bubble is about to burst , the currency has faltered for a few days and then bounced back even higher. As it stands at the moment the general consensus is: as long as investors are willing to buy, there will be a market.

Despite the uncertainty of the Bitcoin market, tech-savvy property investors are willing to take a risk on the cryptocurrency. As with all things, before diving into investment projects and wondering whether to invest, do your homework thoroughly and look at the entire picture.

 

Insuring your most valuable assets

Owning a home comes with plenty of other considerations which one might not always be top of mind, one of which is insurance. Homeowners must always ensure that they are correctly covered; knowing what is covered and what isn’t can save you a lot of money and heartache in the future.

 

“Your home should be a place where you can always relax and being adequately insured will give you peace of mind for when life happens. From the structure itself to the valuables inside, being adequately insured will ensure that you are not burdened with the financial loss whilst going through the emotional stress of unexpected” advises Craig Hutchison, CEO Engel & Völkers Southern Africa.

 

It can be daunting choosing the right cover, whether you’re moving or want to renew your policy; here are some basics that everyone should consider:

 

Difference between Home Content & Building Insurance

Home contents insurance covers all the items in your house that you would take with you if you were to move.

Includes:

  • Cover for loss or damage to household goods and personal possessions
  • Cover for loss or damage caused by fire, lightning, power surge, explosion, malicious damage, storms, bursting or over-flowing of geysers, equipment or pipes, break-in and theft
  • Cover for food that deteriorates because of a power failure or if your freezer breaks down
  • Cover for stolen washing and/or garden furniture
  • Cover in the event of you and/or your spouse’s death if caused by fire or break in at your home
  • Cover for your domestic employees’ or guests’ belongings (only if there is proof of damage caused by a break-in)

 

Building insurance covers you for environmental and accidental damage that might happen to the physical structure of your house and outbuildings.

Includes:

  • Loss or damage caused by fire, lightning, explosion, earthquakes, the bursting or overflowing of geysers, equipment or pipes and storm or flood
  • Damage caused by animals, vehicles and falling trees
  • Malicious or intentional damage
  • Break-in or theft – if that break-in or theft causes damage to the actual building
  • Rent you lose if your tenant has to vacate the building as a result of damage by anything covered by the policy

 

The value a home is insured for does not reflect the market value of the property, but represents the amount it will cost to rebuild the entire house following destruction.

 

Home & Building Insurance options

There are many options available and every policy is different, it all depends on your specific need, property and personal criteria. According to Attie Blaauw, head of Personal Lines Underwriting at Santam these are the most popular options available for both home and building Insurance:

 

  • Fire
  • Subsidence & Landslip
  • Explosion
  • Lightning
  • Flood
  • Sea surge
  • Water/snow
  • Storm/wind
  • Hail
  • Earthquake
  • Burglary/theft
  • Malicious damage
  • Power surge
  • Accidental damage

 

 

What to look for when choosing Home & Building Insurance?

Know what’s covered:  It sounds simple but many people don’t know what is actually covered by their policy.

 

Beware of the upselling mortgage broker: Many banks and building societies encourage borrowers to take out home insurance that is tied in with their mortgage but you may find you are paying more than if you researched the market and insured through a broker. It is always worth looking for the policy that suits you best and provides the best value.

 

Estimates: Always ensure that you have accurate estimates for both the re-build cost of your home and the replacement cost of all the contents you had in mind when taking out the policy.

 

Keep an eye on annual increases: Most home insurance policies will increase every year on the basis that re-build costs are also increasing, always keep an eye on these increases.

 

True value underestimating: The true value of your home’s contents is a common mistake. Overlooking a few of those recent purchases could mean that some items may not be covered under your current policy. Always keep an up to date valuation of your possessions to ensure you have everything covered.

 

A list of what is covered must be drawn up and checked: Some policies offer more benefits than others, so it pays to check ‘who pays for what’.

 

The home must be insured for the full replacement value: This is not the same as the market value. The value of the land on which the house stands is excluded from the calculation of the replacement value of the actual building of the house.

 

What does Home & Building Insurance NOT cover?

Colin Mchunu, Senior Manager, Alexander Forbes Insurance advises you to check the exclusions as they differ from insurer to insurer. Every insurance company is a little different and what is included or excluded on your policy depends on their rules as well as the type of policy you have. It’s important to be aware of all exclusions on the policy and to prepare yourself by purchasing additional coverage to fill the gaps where needed.

 

Instances in which a claim may be rejected:

  • Damage caused by pets such as soiling, scratching, tearing, denting or defacing of the property.
  • Should you run a bed and breakfast from home; the appliances in the rooms are excluded from household cover.
  • Not all theft claims are covered unless forcible or violent entry on the property is visible.
  • If there is an indication of poor property maintenance resulting in damage that could have been avoided, namely termites, insect damage, bird or rodent damage, rust, rot, mould, and general wear and tear are not covered.
  • If there is damage to the property caused by roots and weeds.
  • Chipping of sanitary ware, wall or floor tiles or paving is not covered.
  • If there was a lack of sufficient security in place at the time of your claim.
  • If your home was left unoccupied for a significantly long period of time.
  • If your home should suffer a power outage, things like food spoilage are not covered under a standard policy.

 

Are you required to have Home & Building Insurance if you own a home?

Your mortgage lender would have made it a condition of the mortgage terms that your home has adequate building insurance covering your property’s structure and permanent fixtures. That’s not likely to be the case when it comes to contents insurance.  If you no longer have a mortgage and your property is owned outright, there’s no legal obligation to have either home buildings or home contents insurance.

Factors to consider to determine if you getting best premium

According to Colin, Alexander Forbes Insurance controllable factors that may influence an insurer’s quote are:-

  • previous claims you have made
  • superior security protections in place
  • voluntary additional excess you may choose

What factors can affect Home & Building Insurance premiums?

  • Value at risk
  • Location of risk
  • No claim bonus
  • Excess applicable
  • Security measures
  • Construction of building and extent of cover

 

“Your home is an extension of you, and considering the investment made on the property purchase, it is important to ensure home and contents are sufficiently covered in order to avoid costly surprises in the event of loss or damage” Craig concluded

Mortgage Bonds

Banks and mortgage companies understand that purchasing a home is an important investment, whether you’re a first time buyer, or buying your second or third home.  A mortgage is simply a loan that is secured on immovable property, normally your home. The mortgage is lent to you in a lump sum to pay for the property, which needs to be paid back over a period of time.

 

It’s important to be familiar with what is required from you and what precautions you can take, to ensure that you qualify for a home loan. “Be sure to use a reputable estate agent and mortgage originator to ensure you to make the best decisions for your unique circumstances, as they act as the liaison between you, the seller and financial institution” advises Craig Hutchison, CEO Engel & Völkers Southern Africa.

 

There are certain things that you should know about the loan application process before you apply for one, the actual process and financials required are often not known. We have a look at the options available to you and answer some important questions that could help you once you decide to search for a new home.

 

Type of Mortgage options

  • Variable Home Loanthis type of home loan is very popular among new homeowners, the interest rate is attached to the prime loan rate, if the prime loan base rate goes down by 1%, the interest rate follows, but unfortunately, it also works the other way around.
  • Capped Rate Home Loan – the criteria is very strict and hard to meet, it’s seldom available with a maximum rate built into the loan. When interest rates go down, you enjoy the benefits, and when interest rates go up, you are not affected since you are only required to pay the agreed capped rate.
  • First Time Buyers Home Loan – this is an opportunity for people who would like to invest in a home but may not have the required amount to deposit on it. Banks are now open to lending more than 100% of the purchase price, which includes registration and transfer costs. This works best for people who have never applied for any home loan or never owned any property.
  • Fixed Rate Home Loan – has a fixed interest for a certain period, which covers one or two years. The fixed rate would always be higher than the base home rate but will protect you from increasing rates. This will free your mind from potential increasing interest rates since you already know what your repayments are. While this may be good, it will also be a disadvantage once the interest rate drops, since you will still be paying the same interest rate.
  • Reducing or Step Down Home Loan – here there will be a guaranteed small interest rate decrease every six months for an agreed period. Even when the home loan interest rate rises or falls, the gradual reduction would still apply.

 

Benefits of using a Bond Originator

  • You only need to complete one application, which will be submitted to all the major banks by your Bond Originator. After your approvals are received it’s up to you to decide which bank your wish to go with.
  • The Originator knows exactly what is needed and will collect all the necessary documentation and setup your application to ensure the process is a smooth one.
  • Bond Originators have a strong relationship with all the major banks therefore they are able to negotiate a lower rate on your bond, as the banks will be competing for your business.
  • The best feature of the Bond Origination industry is that the service offered is totally free. The bank pays the originator and these costs are not passed onto the client.

 

Steps in the Bond registration process

  • Step 1 – The Bond Attorneys (appointed by the bank registering the bond) request the draft deed and guarantee requirements from the Transfer Attorney (appointed by the Seller to transfer the property to the Buyer’s name) who obtains this from the Cancellation Attorney (appointed by the bank cancelling the Seller’s bond).  This information is forwarded to the Bond Attorneys to draft bond documents. The same attorney could be appointed to do all.
  • Step 2 – The Transfer documents are signed by the Buyer & Seller.
  • Step 3 – The Buyer pays transfer costs and the Transfer Attorney pays the rates & taxes, which allows them to obtain a rates clearance certificate. The Transfer Attorney also pays the Transfer Duty. Both of these are legal requirements for registration to take place.
  • Step 4 – Bond documents are drafted, signed by the Buyer and the guarantees are forwarded to the Transfer Attorneys, who in turn forwards the guarantees to the Cancellation Attorneys to obtain consent for cancellation from the Seller’s bank.
  • Step 5 – The Buyer pays the bond costs to the Bond Attorneys.
  • Step 6 – Once all documents have been signed and the costs paid, the Transfer, Bond & Cancellation Attorneys arrange for simultaneous lodgement of the documents.
  • Step 7Once lodged, the deeds office takes approximately 7 – 10 working days to process the documents before registration takes place.
  • Step 8 – Payment of the guarantees is made on date of registration of the bond. The registration process typically takes between 8 and 12 weeks to complete. However delays are possible if some information is not provided.

 

What is Pre approval?

A Bond Originator can be contacted to get you pre-qualified for a home loan even before you have started the house hunting process. They will take you through the pre-qualification process where you will need to submit supporting documents for a credit check and financial assessment which will need to be done. Once that is completed they will issue you with a pre-qualification certificate that is valid for 3 months. Now that you know what you can afford you can start your search.

 

What other costs are there associated with Mortgages?

Transfer fees

Whenever you buy a house valued at over R900 000 fees are payable to the South African Revenue Service (SARS). It is calculated as a percentage of the purchase price and varies depending on the purchaser’s legal status. The transfer duty is paid by the purchaser of the property prior to registration of transfer, or within six months after signing the agreement. There is a penalty fee for late payment of 10% per annum for each completed month after due date is levied.

 

Bond registration costs

The attorney registering your bond charges fees. They receive an instruction from the bank that has approved your home loan, draw up the paperwork, do FICA checks and lodge at the Deeds office. These attorneys should be in touch with you within a week of your mortgage being approved. They will ask you to come into their offices to sign the necessary documents.  The fees are charged on a sliding scale, and your mortgage originator will be able to inform you how much these will be.

 

Conveyancing costs

The conveyancing attorney is appointed by the seller, but paid for by the buyer. After the introduction of the National Credit Act the banks no longer charge a valuation fee but have included it in their increased  ‘initiation fee’ . These fees are on a sliding scale that your Originator can help you with.

 

Bank’s initiation fees

Under the National Credit Act banks are allowed to charge up to R5,700 for their initiation fees. These vary from lender to lender but expect to pay at least R3,500 and no more than R5,700.

 

Ways to pay off your bond ahead of time

  • Refinance your home loan from a standard 20-year term to a 10-year bond. If you refinance to a 10-year home loan, you’ll typically pay a lower interest rate while making larger payments each month. Since your term is so much shorter and the interest rate is likely much lower, you will have a considerable saving on your interest costs.
  • Paying extra into your bond – consistently adding just R1 000 to your monthly bond payment can make a big difference, if interest rates stay the same, you could pay off your bond more than three years earlier, and save in interest, compared with having a bond for 20 years.
  • Use salary increases on your bond – one way to find extra cash to put toward your home loan is to use your salary increases. The goal is to put the same percentage of your income toward your bond, even when your pay goes up, if you’re currently putting 15% of your income towards your bond payment, 15% of each annual increase amount should also go towards your bond, in addition to what you’re already paying.
  • Use cash windfalls to pay lump sums – instead of paying a little extra each month, you could pay a large lump sum here and there, such as from an annual tax refund, 13th cheque or bonus, or inheritance.

 

How high do you score?

An excellent credit score is one of the most priceless assets a potential home buyer can have. This tool has the power to secure favorable mortgage and refinancing rate, influencing everything from the size of the loan repayment to the interest rate on the home loan.

 

“It is advisable that potential home buyers check their credit score before even starting to look for homes or applying for a home loan, as the banks will look into your financial history and the application will be declined if you have a low credit score. The important thing is that your accounts are up to date and that you have the ability to afford the bond” advises Craig Hutchison, CEO Engel & Völkers Southern Africa.

 

South Africans are entitled to a free copy of their credit record every year. “Many South Africans are surprisingly unaware of the importance of a good credit profile, many do not know what a credit profile even is, and even if they do, they seldom check their own personal credit profile. Today many potential employers look at credit profile reports as a way to judge a person’s character and level of responsibility” says Mellony Ramalho, Group Executive African Bank.

 

Your credit score is typically a number from 0 to 999 and is calculated by using all the details on your credit profile. “It reflects a ‘score’ summary of all your financial decisions, it is often used by lenders, such as home loan and personal loan companies, to make accurate decisions on whether they should lend to you or not” says Michael Bowren, CEO and founder Fincheck. Overall, a credit score measures the amount of potential risk the consumer is to the creditor.

 

We take a look at what the experts have to say about credit scores and what should and shouldn’t be done.

How does a credit score work?

The higher your score the better your credit health will be, which will be an advantage when applying for a home loan, making it easier for you to borrow money at lower interest rates. “The lower the score, the higher the risk which then influences the outcome of the credit application” advises Andile Fulane, CEO, Seed of Prosperity.

 

By managing your credit profile effectively, you can ensure your image and profile is viewed favorably by lenders or other organizations. A bad credit score would mean the exact opposite of this and result in almost no financial institution willing to offer you a home loan.

 

Credit score guideline:

 

Credit Score Range Description Risk Band
767 – 999 (Excellent) Consumer has an high probability of collection
  • Low Risk

 

681 – 766 (Good) Consumer has an average probability of collection
  • Medium Risk

 

614 – 680 (Favorable) Consumer has an low probability of collection
  • Potential High Risk
583 – 613 (Average) Consumer has an low probability of collection
  • High Risk
527 – 582 (Below Average) Consumer has an low probability of collection
  • High Risk
487 – 526 (Unfavorable) Consumer has an low probability of collection
  • High Risk
0 – 486 (Poor) Consumer has an low probability of collection
  • High Risk

 

How do they calculate your credit score?

Your credit score is calculated by a credit bureau based on your credit report. They consider how you pay your bills, how much debt you have and more importantly, how all of that compares to other credit active consumers. Each bureau has a different way of calculating your score and take into account different forms of information, including information their organization already holds on you, or your employment circumstances.

 

Your credit score is only one part of your credit report although it is almost the single most important item on your credit report; the full report gives you some handy information. Your credit report is a combined summary of your financial background with an overview of your credit score, financial accounts, profile, and rating.

 

What influences your credit score?

As you start transacting with various banks, retailers and other financial institutions like lenders, you start building a financial history. Your credit history will be determined by the amount of money you have borrowed in your life and how much of it you have diligently paid back on time.

Credit score is affected by the following:

  • Missing payments or not paying on time, even if you make double payment the following month the score will affect your credit history. “While adverse legal information is cleared as soon as the account is settled, the negative repayment history however remains for a couple years,” explains Ramalho.
  • Too much debt – how much you owe and how much of your available credit you’re using – it is advisable to try to keep the use of your current credit facilities to less than 35% of your limit.
  • Negative information like a court judgment taken against a consumer’s name (commonly known as blacklisting).
  • Length of credit history.
  • Account application and enquiry activity – within a short period of time, how many account applications the consumer submitted and how many new accounts you opened.

 

My credit score is lower than I expected. Why is this?

 Fincheck provide us with some reasons:

  • A credit history of fewer than 6 years, which is the time frame used to calculate your total credit score.
  • Missed or late payments over the last 6 years.
  • Holding very few credit accounts means there will be less credit history available on your profile.
  • Court judgments or record of insolvency.
  • Having a lot of unused credit available could lead to a large balance of debt if you decided to use it all at once.
  • Balances on your accounts that are very close to the credit limit indicate that you rely on credit to get through each month.

 

Why improve your credit score?
Credit providers measure their risk in taking you on as a client before they approve or decline your application for credit, so improving your credit score increases the chances of being granted credit on favorable terms.

 

How to improve your credit score

  • Regularly checking your credit report to confirm all the details are correct.
  • Making sure you make payments on any outstanding credit accounts on the due date. (Should you have difficulty in making your payments, you should contact your credit provider to agree on a payment plan, or to reduce your regular payments to an amount that you can afford to pay).
  • Consider setting up regular automated payments rather than doing manual payments.
  • If you have too many old, unused credit accounts, consider closing them.
  • If you are almost reaching your credit limit on one or more accounts, try and reduce your balance. Outstanding balances mean you have a lot of outstanding debt in your name.

 

How long does it take to improve your credit score?

It depends on how long it will take to improve areas that need attention and maintain them, real improvement will start showing after three months of consistency, as you show progress your credit score will automatically get updated.

 

If you have had a couple bad experiences with your credit health, it is helpful to know that, credit inquiries stay on your credit report for up to two years, whereas more serious activities that incur namely late payments, lawsuits, bankruptcy and tax liens will stay on your credit record for up to ten years.

 

How to build up a credit score if you don’t have debt

Unfortunately you won’t have a credit score if you don’t have any debt because your credit score is calculated and based on your credit habits. This doesn’t mean your financial health is bad, there’s just simply not enough data to give you a credit score. This can be bad news if you’re looking for a home loan though, so your first steps will be to apply for financial products where you can start building a credit record.

These can include:

  • Credit card
  • Vehicle finance
  • Phone contract
  • Clothing accounts

 

Consequences of a bad credit score

  • Not paying your account on time or at all which can result in you not getting further or desired credit when needed.
  • Lenders will see you as a high risk meaning that should they decide to take on that risk, they will charge high interest rates compared to someone with a good credit score.
  • Depending on what industry you are in – some industries such as banking – check a potential employee’s credit report and score. They consider a bad credit score as someone who is not trustworthy to work in a banking environment.

 

Consequences of not checking one’s credit score

It is advisable for a consumer to check their credit report every 3 to 6 months. Statistics show that only 3% of the 24 million credit active South Africans have seen and understood their credit report. This comes as a threat of potential identity theft where someone can use a consumer’s ID to clone their profile and open lines of credit. A credit report contains so much personal information including addresses, phone numbers and employment that the leak of such information poses a big risk of fraud to the individual.

 

How a credit score affects you when applying for a home loan

When it comes to taking out forms of credit like a home loan, your credit score plays a vital role in your eligibility for a home loan, however it’s not the only factor to affect your application, your debt-to-income ratio will also play a big role.

What score do you need to qualify for a home loan?

There’s no specific score which will qualify you, if you follow the step to build a healthy credit score and maintain a healthy debt-to-income ratio, lenders will see you as eligible for things like home loans. Most lenders prefer to lend to an individual whose debt is less than 36% of their gross income. This, along with healthy credit habits that keep your score in the ranges above 650 will put you in a good position to secure a home loan.

 

If you are declined for a home loan, what should you do and when do you apply again?

It’s important to know that if you apply for any hard forms of credit like a personal loan, credit card or home loan, you will get a hard inquiry against your credit report, too many of these are a red flag to lenders.

 

If you have had an unsuccessful home loan application, take a step back and start improving your credit health. There’s no fixed time frame for this, it will take as long as you take to form healthier credit habits, pay back debt and wait for that very happy green indicator on your credit report.

 

How can you get your credit score?

  • Fincheck aims to help people make better financial decisions. They have spent a lot of time and effort in building a tool to help you do all of the above. You can sign up for the MyFincheck Credit Score Tool and get your FREE score directly.
  • For more information about your credit score and assistance in improving it, you can download the Moneyac app available on the Google Play Store alternatively go to the website www.moneyac.club where you can access your credit report and experts that can help with anything related to financial health.
  • TransUnion – 086 148 2482
  • Experian – 086 110 5665
  • Xpert Decision Systems (XDS) – 086 112 7334
  • Compuscan – 086 151 4131

 

“It is never too late to begin working towards an improved credit profile. After all, it could be the difference between you being able to purchase your dream house, finance a vehicle, pay emergency medical expenses or further your studies one day” Craig concludes.