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.

 

The impact of a Budget on a homeowner

In this current turbulent economy, creating and sticking to a personal budget is a fundamental step towards really managing your money effectively and avoiding debt. This requires time and discipline – you will need to honestly examine your income, spending habits, and debts, and make some key decisions about how you will spend your money going forward.

 

The word budget might bring on negative feelings in some; they associate it with restrictions and a lot of hassles. “With a budget, you can begin to prioritize your spending and better manage your money and financial future. Instead of viewing a budget as a negative, view it as a tool for achieving your financial goals, and a step closer to owning your new home or even a second home” says Craig Hutchison, CEO Engel & Völkers Southern Africa.

 

You may perhaps feel like you do not have any funds to budget with, and that each rand already has its allocation. However, keeping a budget might highlight areas where you would never have suspected an over spend. Budgeting is simply the process of creating a plan of how and where to spend your money that you receive, by balancing your expenses with your income.

 

Benefits of having a budget and sticking to it

A budget is there to enable you to get a hold on your spending and save where you can, and it will also keep you out of debt or help you work your way out of debt.

 

It gives you control: If you feel like you are not in control of your money and you are constantly wondering where it went and what happened to it, budgeting can put you in control. When you budget wisely and understand where your money is going, you will feel more in control and at ease with your financial situation.

 

Puts the brakes on spending what you don’t have:  It forces you to work with the money you have – you’ll know exactly how much is coming in this month, how much you need to spend and save and how much you have left over. It will discourage you from relying on credit cards to make unnecessary purchases and end up with major debt problems.

 

Work towards your dreams: It teaches you to save first and to decide what to save for. This will help you to map out your life goals and you can focus your money on the things that are most important to you. You will find it easier to turn down impulse buys and to put your money where you really need it. This may be getting out of debt, saving up for a home or working on starting your own business.

 

Prepare for emergencies: An emergency fund should cover 3 – 6 months of your living expenses so that you can survive until you are back on your feet. Don’t try to save this fund all at once. Rather, build a payment plan into your budget and start growing the fund as soon as possible.

 

Keeps your credit score healthy: 35% of your credit score is based on your payment history, while 30% is based on your debt-to-credit ratio. By paying your bills on time and paying down your debt, you’ll boost your credit score considerably, which means that you’ll have an easier time qualifying for loans with lower interest rates when you need them.

 

Tips for starting a budget

  1. Gather every financial statement you can. This includes bank statements, investment accounts, recent utility bills, and any information regarding a source of income or expense.
  2. Record all of your sources of income.If you are self-employed or have any outside sources of income, be sure to record these as well.
  3. Create a list of monthly expenses.Write down a list of all the expected expenses you plan on incurring over the course of a month. This includes a mortgage payment, car payments, auto insurance, groceries, utilities and entertainment – essentially everything you spend money on.
  4. Break expenses into two categories: fixed and variable.Fixed expenses are those that stay relatively the same each month. Variable expenses are the type that will change from month to month.
  5. Total your monthly income and monthly expenses.If your end result shows more income than expenses, you are off to a good start. This means you can prioritize this excess to areas of your budget or pay more on credit card balances to eliminate that debt faster. If you are showing a higher expense column than income, it means some changes will have to be made.
  6. Make adjustments to expenses.If you have accurately identified and listed all of your expenses, the ultimate goal would be to have your income and expense columns to be equal. This means all of your income is accounted for and budgeted for a specific expense or savings goal. If you are in a situation where expenses are higher than income, you should look at your variable expenses to find areas to cut. Since these expenses are typically non-essential, it should be easy to shave a few Rands in a few areas to bring you closer to your income.
  7. Review your budget monthly. After the first month take a minute to sit down and compare the actual expenses versus what you had created in the budget. This will show you where you did well and where you may need to improve.

 

Budgeting to buy a home

A good budget plan begins one or two years before the buyer makes an offer. Having a monthly budget has more advantages than simply making sure you have enough in the bank to cover your bills – it can also help you determine how much house you can afford.

 

Here are four tips for renters who plan to become homeowners:

  • Build strong credit and raise your credit score – The most important focus for all potential buyers should be improving their credit score. A low score can prevent someone from buying a home or at least from qualifying for an affordable mortgage rate. To improve credit scores, buyers should pay off past-due bills, pay every bill on time and reduce their balances to less than 30% of the credit limit on every account. It is best to have three to five credit accounts, such as a car loan, student loan or credit card, for one year or longer.
  • Reduce debt – while buyers increase their savings, they should also reduce their debt. Paying off debt tops saving in terms of priorities because of the interest payments on the debt, which exceeds the amount of interest they can earn on their savings. Lenders want to see that you are managing your debt and keeping your credit card balances low.
  • Practice making house payments – future homebuyers are encouraged to make “virtual” mortgage payments as a way to build up savings and learn to budget for actual mortgage payments down the road.

Keep an eye on DTI – debt-to-income ratios are an important element in a loan approval. This ratio compares minimum monthly payments on all debt to gross monthly income. If your debt-to-income ratio is over 50%, you need to pay off your debt before even thinking of buying a home.

 

 

What should you budget for?

Hollard lists some of the major expenses, to help you prepare for the other costs associated with your new dream home:

  1. Deposit

Banks typically require a 10% deposit on the purchase price of your home, but this can be as much as 30% depending on your credit rating. If you are in the market to buy, you’ll need to have a deposit in hard cash. It is paid upfront and once-off to the transferring attorneys.

  1. Initiation fee

This fee is charged by the bank at the start of the loan (if you take out a bond).  It can be paid upfront and as a once-off fee, or capitalised to your loan amount.

  1. Transfer duty

After your deposit, the transfer duty is one of the biggest upfront and once-off costs to consider when buying a property. Transfer duty is a tax levied by the government and no property can be transferred to a new owner if this is not paid. The only time transfer duty is not payable in a normal sale of property is when you are buying from a registered VAT vendor (developers as an example), in which case VAT is included in the price. The higher the value of the property you buy, the higher the percentage of duty payable. Property transactions below R900 000 are exempt from transfer duty.

Tip: See SARS website for transfer duty rates based on property price categories.

  1. Transfer costs

Transfer cost is the professional fee that the conveyancing or transferring attorney charges in a property transaction to register your ownership of the property with the Deeds Office, protecting your legal title to the property. This is paid once-off before registration and is not to be confused with transfer duty.

  1. Bond registration costs

For the bank to make sure that they have some form of security over the property you have taken a loan on, they will register a mortgage bond that confers certain rights on them. This bond is registered at the same time as the transfer of the property and is done by the bond registration attorney, an attorney on the bank’s panel. Similar to transfer costs, this attorney will also charge his professional fee for registering the bond, which the buyer has to pay.

  1. Occupational rent

This is a fee that is payable only if you take occupation of the property before the transfer of the property into your name has been registered. The rate is usually stipulated in your Offer to Purchase.

  1. Moving costs

Shop around for the best rates and service, and remember that typically month-end is busiest and more expensive. Some removal companies offer special pricing during off-peak times, so don’t be afraid to ask.

  1. Protect your finances with a Home Warranty 

Research shows that most defaults on home loans occur within the first 18 months from when the loan is taken, because this is likely to be the time you’re most financially stretched and can least afford costs associated with hidden defects. Hollards Home Warranty addresses the issues around defects, with a professional property inspection that is coupled with an insurance policy. This protects you as the buyer against the financial ramifications of any hidden defects that may emerge in the property for two years after taking transfer.  The cost of the warranty is covered by the seller – all you have to do is ask for it in your Offer to Purchase.

  1. Homeowners and life insurance 

The bank will require protection to ensure that the value of their security on your loan, the house, remains intact. To achieve this, the bank will require that you take out two types of insurance which need to stay in place for as long as you have the loan with the bank.  The first is homeowners’ insurance which protects the bricks and mortar of the property against an insured peril such as fire, flood and so on. The second is life cover which in the event of the death of the property owner or bond holder, the insurance will settle the outstanding bond amount so that your family is not lumbered with the debt you owe to the bank.  In both instances, you have the option to take this insurance through the offering via your bond provider, or through your current preferred broker or insurer. It is often worth comparing and shopping around to see where you get the best offer. Where you do not use the bank’s offering you will need to provide proof of external insurance.

  1. Contents insurance 

Although not obligatory, it’s highly recommended that you insure the contents of your home against loss or damage as a result of theft or burglary and other perils such as fire, flood and extreme weather conditions.  This insurance is often combined with homeowners insurance, and if you have car insurance, with one insurer, this usually results in a much cheaper combined premium.

  1. Rates and taxes

Once the transfer is completed, you will need to register for rates and taxes as well as your water and electricity services. The municipality will require a deposit – the amount varies from municipality to municipality and is linked to the municipal value of the home.

  1. Total cost of ownership

Owning a home comes with on-going costs such as electricity, water and refuse removal (on your municipal account), garden and cleaning services, maintenance, painting and so on, which all need to be budgeted for.

 

 

If you need help, there are various tools to help you get started on the road to financial freedom, and if you are planning on buying a property a real estate agent might be one of your best. They can precisely give you the breakdown of what you need and eliminate any hidden costs along the road which could cause your new home bliss to quickly turn into a nightmare. Prevention is always better than cure.

 

Is your money working for you?

Many people grow up having conflicting values around money and wealth and misunderstanding how they work together. Often a person may say they want to be wealthy, but what they really want is financial freedom. It is of crucial importance to manage your money effectively, master it, and instruct it to do what you want it to do for you. You’ll start seeing how your money can work for you when your future needs become more important than your current wants.

 

Money is what makes the world go round. Just like you have a job, your money has a job too, and it should work just as hard for you, as you have worked to earn it. Whether you’re a stay at home parent taking care of your home and family or a professional working crazy hours, having money in the bank is essential.

 

All is possible through either investing or saving part of your hard earned cash every month. There is a clear difference between investing and saving. Saving is storing your money, while investing is growing your money. One of the significant differences between the wealthy and not so wealthy is that wealthy individuals earn interest while everyone else pays interest.

 

The way that the prosperous continue to build their wealth isn’t really a secret; they spend less than they earn, save the difference, and let the potential of compound interest make their riches grow. Financial wellbeing is a long-term commitment, but with the right guidance, discipline and savvy decision-making, you may achieve your goal sooner than you think. It is never too late to start investing in your financial well-being.” states Craig Hutchison, CEO Engel & Völkers Southern Africa.

 

Here are some pointers on getting your money to start working for you:

 

Get Out of Debt

Your money doesn’t really belong to you until you’ve paid off your debt. This includes all debt, even if it is good debt. Your extra cash is better spent towards growing your net worth before anything else.

 

It may seem like a problem that is too big to tackle. The trick is to start by just clearing up your smaller debts and then work towards tackling the larger debt with the extra money that you have available.

 

Take a moment and just do a quick calculation on the interest you pay monthly just on interest – imagine having those additional funds each month. As you pay off more debt, and then apply that money to the next debt, you begin to build momentum and you will be surprised how quickly you be debt-free.

 

 

Have a budget

Your budget is the best tool you have to give you control over your finances, this will allow you to make financial decisions at the beginning of the each month by telling your money where to go instead of later wondering where it went. Always pay yourself first – make sure putting a little away for the future is your number one objective.

 

Once you have mastered budgeting, you will be able to reach your financial goals more quickly and avoid debt. Now that you have a flowing stream of savings coming your way, you are ready to put it to work. The next step would be to choose a vehicle for growth that suits your lifestyle and your long- and short-term goals. Consulting a financial planner can help you find the right fit.

 

 

Grow your wealth

You don’t have to be extremely wealthy to take advantage of investing over time, you might not be able to stop working and just live off your dividends any time soon, but the rewards will pay off in the future. It is important to remember to diversify your portfolio; you should never want to have all of your money invested in a single spot, venture or business.

 

“Be careful who you trust with your money, make sure you invest your money with a reliable and established company with a solid history and reputation, do your research and do not be afraid to ask questions” Craig advised.

 

Popular investment options:

 

Retirement fund

The key to retirement is to start investing as soon as you can. Your retirement savings are dependent as much on your ability to be patient and to leave your nest egg alone, as it is on the contributions you make every month. Make sure you have a good financial planner to help you invest your money.

Pros:

  1. Income tax benefits
  2. Possible employer matching your monthly contribution
  3. Loans in the event of an emergency or financial crisis

Cons:

  1. Most plans have limited flexibility as it relates to quality investment options
  2. Fees can be high
  3. There can be early withdrawal penalties

 

Unit Trusts

unit trust pools money from many investors, to invest in assets namely shares, bonds or property. Instead of having to select individual investments yourself in hard to reach markets, a unit trust offers you exposure to a range of assets, which are selected and managed by investment professionals. Unit Trust is a smart way to save and beat inflation. As the cost of living increases, you need your money to increase with inflation, investing in a unit trust allows your money to do just that.

            Pros:

  1. Funds are managed by experts
  2. Stockbroker fees may be negotiated at a lower rate
  3. Easy diversification – investing in a variety of securities

Cons:

  1. There are costs over and above those you’d pay if you were investing directly
  2. Unit trusts may not be as liquid as some other investments
  3. Reliance on managers to select the best appropriate funds

 

Stock Market

The first step is to gain a good understanding of what the Johannesburg Stock Exchange (JSE) is all about. Speak to a stockbroker about your investment goals. The JSE has a variety of products which can help you reach your desired goals. One of these is a tax-free savings account (TFSA). A TFSA is an account that provides tax benefits for investing, and the JSE TFSA provides investors with a way to invest in Exchange Traded Funds (ETFs). ETFs are ideal for first-time investors exploring the stock market.

Pros:

  1. Highest returns
  2. Income from dividends
  3. Stocks are highly liquid

Cons:

  1. Volatile in the short term
  2. If you pick the wrong stock, you risk losing the value of your investment
  3. It takes knowledge and time to analyse a stock

 

Stokvel

This is a book-based savings account made up of a group of individuals with similar goals, which allow them to save for a common purpose. Members contribute fixed sums of money to a central fund on a weekly, fortnightly or monthly basis with a better return on savings and interest rates. The group then decides on how that money is shared, whether it is a monthly pay-out, or invested and then shared at the end of the year. Originally these were informal savings agreements, but it has evolved and banks are now offering savings products specifically designed for Stokvels.

Pros:

  1. Can be set up informally as they are not legal entities
  2. The costs of running a stokvel are quite low
  3. Individuals who are part of a stokvel can perform its activities outside of interference from the government

Cons:

  1. Enterprises obtain a lack of cost advantages due to the size of operation
  2. The prospect for growth is limited
  3. High Risk – The scheme is based on trust

 

Shares

A share is one of the equal parts into which a company’s capital is divided, entitling the holder to a proportion of the profits, if any are declared, in the form of dividends. You don’t need thousands of Rands to start investing in shares. Imagine you want to invest in a company worth a R100 000, but you don’t have R100 000 to buy it, or the owners don’t want to sell all of the company. Buying shares is exactly what it says, you buy a share of the company.

 

Pros:

  1. Potential capital gains from owning an asset that can grow in value over time
  2. Potential income from dividends on share holdings
  3. Lower tax rates on long-term capital gains

Cons:

  1. Share prices for a company can fall dramatically
  2. If the company goes broke, you are the last in line to be paid, so you may not get your money back
  3. The value of your shares will go up and down from month to month and the dividend may vary

 

 

Kruger Rands or Gold

Another option to diversify your portfolio is to invest in something even more solid such as  Kruger Rands. These gold coins tend to perform well in highly uncertain circumstances, and can provide protection against extreme market turmoil.

 

Bitcoin

Bitcoin is an online payment system. This system is peer-to-peer, and users can transact directly with each other all over the world almost instantly, without needing an intermediary such as a bank, Western Union, Moneygram, Paypal or any other company. The Bitcoin system works without a central repository or single administrator, so is the world’s first decentralized digital currency, and it is the largest of its kind in terms of total market value.

 

Bitcoin cash was created to give people a way to send and receive real money anytime, anywhere, without the intervention of banks and governments. Bitcoin cash has value because the holders of the Bitcoin core collectively agree that it has value. Such mutual agreement between thousands of buyers and sellers around the world enable Bitcoin cash to be used as medium of exchange in online transactions.

Pros:

  1. Not tied to any traditional financial institution or government
  2. Traders can remain anonymous
  3. Access to historically inaccessible markets

Cons:

  1. Inherently volatile
  2. Subject to fluctuations in value that can be more sudden than government-backed currency
  3. Not backed by legal protections

 

Property:

Investing in property is often seen as the safer and less volatile choice as it requires a long-term approach. Although with any investment, you do run a risk such as a market or area dip or interest rate hike, this remains one of the best investment options as people will always need to have a home and no matter how big the dip – you won’t lose everything completely – the home is still there and it’s yours.

 

There are various options to consider, namely buying a single home to live in as your investment, or investing beyond your home, in land to sell, commercial property or homes to rent out. Real estate is a favourable investment option because it does not only give you long term growth, but it can be paid up completely and become your sole property whilst still generating an ongoing income if you choose to rent it out.

 

“Having personally invested in a number of the above options, I can with confidence say that property has been a solid investment. You only need to think about what you paid for your first home if you have been in the property market over an extended period of time or alternatively ask your parents what they paid for their first home. I always say that you should get your home valued at least every 5 years so that you know what your investment is doing for you. Property truly gives you the best of all worlds as you get to enjoy it while living there, enjoy rental income if you choose to let, the satisfaction knowing it’s yours, and only yours once paid off, and of course the reward of knowing you have something to leave behind for your children someday” Craig added.

 

Pros:

  1. You could earn monthly rental income if the property is rented out
  2. If your property increases in value, you will benefit from a capital gain when you sell
  3. Property is less volatile than shares or other investments

Cons:

  1. There may be times when you have to cover the costs yourself if you do not have a tenant or for repairs
  2. A rise in interest rates will mean higher repayments and lower disposable income

 

It is crucial to realise that money is a tool that can help you achieve your ultimate goals in order for you to reach true financial independence.

A Guide to Capital Gains Tax

At first glance, Capital Gains Tax (CGT) may seem like yet another thing to worry about when completing a tax return, but it needn’t cause confusion. CGT is not a separate tax but forms part of income tax, which is taxed at a lower effective tax rate than ordinary income. Capital Gains Tax is basically a tax on the resale of assets. Anyone that disposes or sells their fixed assets or following the death of the asset owner, is liable for CGT.

 

When submitting your annual income tax return, any gains or losses based on a transaction during that period must be declared and submitted. “This is where the confusion can occur and it is up to the taxpayer to prove that certain sums were capital, and not revenue. For instance if a property was intentionally purchased with the idea of generating a profit, it would be considered as revenue. But if the intention was as a financial investment, this would be capital” explains Craig Hutchison, CEO Engel & Völkers Southern Africa.

 

Investors need to ensure they keep proof of their objective of purchasing the asset to avoid the normal revenue tax. SARS is at liberty to question the objectives of the investor if there are frequent property transactions, and might very well consider this as a revenue tax. If the homeowner keeps the property for personal long-term capital growth, SARS will see any profit on this as a capital gain.

 

There are a many tax tests implemented by SARS to determine whether to implement a capital or revenue tax. For instance, if the buyer purchased a home for personal use (primary residence) this will be exempt from CGT, with certain limitations. SARS considers the first R2 million gain on the sale of a primary home as CGT exempt. Homeowners who use part of the home for business may be liable for different tax structures.

 

If homeowners understand the basic difference between capital and revenue gain then at least half the battle is won, as everyone always strives to keep their payable tax to a minimum. If you are selling property or intending to, its best you read up on whether or not you need to pay CGT on the profits you make. Here are some pointers to give you a heads up.

 

When did CGT come into play?

Instituted in South Africa on 1 October 2001, this date is considered the “valuation date”, and only gains made on a property from this date is liable for CGT. This means that while any individual selling a property is liable for CGT, the value on which CGT will be calculated will be based on the value of the property as at 1 October 2001, and the gain made from this date, up to the date of sale. Any profits accrued from this date onwards on the sale of specific capital assets will be taxed with CGT.

 

Who is liable to pay CGT? 

Taxpayers, including individuals, trusts, companies and close corporations, will be taxed on the profit they make when they sell an asset or property. A resident, as defined in the Income Tax Act 58 of 1962, is liable for CGT on assets located both in and outside South Africa. A non-resident is liable to CGT only on immovable property in South Africa or assets of a “permanent establishment” (branch) in South Africa. Certain indirect interests in immovable property such as shares in a property company are deemed to be immovable property.

Some persons such as retirement funds are fully exempt from CGT. Public benefit organisations may be fully or partially exempt. Normal rental income from a property is revenue which is declared on your annual income statement and therefore not subject to CGT.

 

When should it be paid?

CGT becomes payable when you receive your income tax assessment (IT34). As a registered taxpayer you will simply declare your capital gains and losses in your return of income covering the relevant year of assessment. Keep the records necessary to determine a capital gain or loss in a safe place as many years may elapse, between the time you acquire an asset and dispose of it.

 

If you are buying South African immovable property from a non-resident seller you must complete form NR02 and an IRP6(3) using the sellers income tax reference number and withhold the tax at the rate prescribed in section 35A(1). You may withhold at a lower rate of tax if the seller supplies you with a tax directive from SARS authorising you to withhold at a lower rate. You must then submit the NR02 and IRP6 (3) together with your payment to SARS. If the seller is not registered for income tax, the NR02 and offer to purchase must be forwarded to nres@sars.gov.za so that the seller can be given an income tax reference number before payment is due.

A non-resident seller of immovable property may be entitled to request that tax be withheld at a lower or even zero rate under section 35A(2). The reasons why a sale would attract a lower rate of CGT will depend on the facts of the particular case, for example, the person may be fully exempt from CGT, such as a foreign state, or in the case of an individual, having a lower level of taxable income or have disposed of the property at a loss. To request a tax directive you must complete form NR03 and submit it together with the offer to purchase, tax calculation and supporting documentation to nres@sars.gov.za or use one of the other submission methods described on the form.

For the purposes of provisional tax a taxable capital gain is excluded from the basic amount. If you are not permitted to use the basic amount for the purposes of your second provisional tax payment you will have to take into account any taxable capital gain that arose or will arise during the year of assessment in estimating your taxable income. Likewise, a taxable capital gain must be taken into account when making any third topping up provisional tax payment.

 

The withholding tax must be paid to SARS:

  • within 14 days of the date on which the amount was withheld by a resident buyer;
  • within 28 days of the date on which the amount was withheld by a non-resident buyer.

 

The above will all be managed by the conveyancing attorney managing the transfer of the property.

 

While this is a very broad overview of what to expect when it comes to CGT, it is always advisable to seek professional assistance to ensure all regulations are complied with and calculations are done accurately.

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