The four “Cs” s to getting property finance
JOHANNESBURG – The property market is slowly recovering and investors are scouting for deals. However, while the banks have started lending more than last year, it is still difficult to obtain finance in this market. Just three years ago credit was easy to come by. Everyone from retailers to micro-lenders were dishing out credit. When the world hit recession, the money dried up. The only applicants to be awarded finance were those who could show that they didn`t really need it. Furthermore, the finance that they did receive was expensive. While a discounted lending rate of prime less 2% was not something to get too excited about in 2006, just a year or two later, investors were lucky to receive any discount at all.
It is important to remember that bank managers are not investors. They seldom understand the principles of property investment- that is let the tenant pay the bond repayments while the investor enjoys the compounded income and capital growth.
Therefore, the key to getting finance at a competitive rate, is to think like the bank manager. The investor who has built up equity in other properties may perceive oneself as less risky than an owner occupier by having the ability to sell a property if running into financial trouble. The bank manager however prefers financing a “less exposed” owner occupier who will cut back on other expenses if necessary to remain in his or her home.
According to renowned international investor Dolf de Roos, getting finance is all about psychology. Don`t ask the bank for finance, rather offer them the opportunity to finance your property. The key is confidence and understanding that the bank also stands to benefit from the transaction.
The banks typically look at four main factors when assessing a finance application.
The applicant’s ability to repay the loan is determined by their monthly income. As a rule, up to 25-30% of an applicant`s gross monthly income may be used in servicing all of their mortgage repayments. Usually only about 50% of rental income being derived will be added to the applicant`s salary. The bank will also assess the net income of applicants to ascertain whether there is enough income to service the bond after deducting all the applicant`s expenses. Self employed people are generally perceived as higher risk.
The bank will do a full credit and employment check in determining whether the applicant can support the loan. Any negative listings will affect the applicant`s chances of getting credit even if the outstanding debt is very small. Too many previous applications for credit may also count against the applicant. The bank will also verify employment and may refuse credit to workers on contract.
Many of the banks will offer an “approval in principle” to applicants meeting the above mentioned “capacity” and “character” requirements for the loan. The final approval will depend on the valuation performed on the property (click here for our valuation tool). While most banks are claiming to offer 100% loans, the more common maximum is a 95% loan to value offering. For investors, many of the banks are only lending up to 75% of the value of the property.
The final factor affecting applicants is one in which they have very little control- the conditions in the market. The retail banking industry in South Africa is dominated by only four major players. While the big four were intent on increasing market share during the boom times, they are now intent on limiting bad debts. Remember, they are not investors and do not see the potential which the property market offers. All they see is unemployment and a softer economy. Give them a few years and 110% loans should be available yet again (Absa is already offering them again see Absa’s plan to seize more lower-income earners)
In the meantime, here are some creative ways to obtain financing:
- Create a proposal for the bank with a computer analysis of the investment including returns and costs as well as cash flows and successful statistics in an existing portfolio (Remember to think like the bank manager!)
- Don`t be limited to the four big-banks. There are other smaller investor-friendly players who are often more flexible. Instead of simply entering thousands of applications into the system for a computer generated approval or decline, here the individuals are making the decisions. Other investment properties which are cash flow positive may not be viewed as exposure at all when assessing affordability.
- Raise 75% finance from the bank and the rest through private investors, family or friends.
- Raise 75% finance from the bank and the other 25% from the seller, repaying him or her in monthly instalments at the same rate charged by banks.
- If one is a builder or can renovate cheaply, one could purchase the property and include a delayed mortgage clause where transfer takes place within six months to a year from the date of the agreement. Then arrange with the seller to immediately begin updating the property which will increase the property`s value. The 75% which may be raised on the property may cover the purchase price. (One needs to be confident here about gaining finance as to avoid renovating someone else`s property.)
Don’t fall for RA tax perk hype
Every year, around this time, taxpayers are besieged with calls and letters from life assurers and other financial service providers encouraging last-minute investments in RAs (Retirement Annuities) as the tax year draws to a close. However, your financial wellbeing is likely to be better served by spending what you have available on property.
The financial services industry marketing machinery is hard at work in February, emphasising how you can save.
I’ve fallen for this hype before. Several times in fact, so I have money tied up in the RAs of various life assurers and private investment company Allan Gray. Years of watching how my investment returns in these RAs have fared over the years have converted me to an RA sceptic. I would rather ignore the tax deduction and invest any money I have for long-term savings requirements in property.
Barring my Allan Gray RAs, the returns have been abysmal. This is because of the obscene costs life assurers deduct from your savings when you invest with them and during the life of your investments. My Allan Gray RAs have benefited partly from the fact it did not deduct any intermediary commissions when I entered the investments directly.
Life assurer Sanlam deducted the maximum commission amounts, even though there was no adviser, and pocketed that difference for itself. My R10 000 and R40 000 RAs created in the early 2000s with Sanlam are still worth less than what I put into them today.
Not even the investment skills of Sanlam’s highly qualified, highly-paid asset managers have been enough to bring the amounts back to the R50 000 that I invested not far off 10 years ago.
Maybe those RAs will turn positive by the end of the next decade or the one after, when I might like to retire? Certainly I’ve lost faith in those RAs being anything more than dud investments.
My only consolation is that I’ve discovered this rip-off approach by the companies who set themselves up as the custodians of our nation’s savings, the people who tell us they know better than we do how we should invest our own money, early enough in my working years to come up with a fresh strategy to, hopefully, build enough money for my retirement.
This week I was reminded, yet again, of why property – particularly do-it-yourself investing in bricks-and-mortar- can be so rewarding. At a property auction I saw a friend cash in his R50 000 or investment (deposit plus costs) in an Atlantic Seaboard, Cape Town rental flat he bought in the early 2000s. He walks away with about R2m in his back pocket, after tax is paid and the remaining mortgage is settled. During the course of his investment, a tenant effectively paid the costs for him.
There are many more residential property investment success stories like this among my circle of friends. Provided you buy at the right price, in the right area, hold property for at least five years and don’t dip into the equity by remortgaging for things other than property, it seems it is very difficult to go wrong. You can do it yourself, probably better than any highly-paid investment professional could do any investing for you.
The RA tax perk is probably well-intentioned. With the nation’s poor savings rate and most people impoverished in their retirement, it may be the responsible thing for our policymakers to keep this tax benefit in place. Unfortunately for the nation’s savers, the financial services industry has on the whole abused this perk and turned it into an advantage only for its managers and operators rather than its clients.
Maybe finance minister Pravin Gordhan should consider revising the RA perk this year, allowing others who save outside the financial services industry – like in property – to benefit from such tax perks too. Or, perhaps he should somehow penalise the life assurers, asset managers and other intermediaries who wipe out any of the tax perk’s benefits through their hefty charges? After all, it is not in the nation’s interests for ordinary South Africans to be falsely lured into thinking that offerings like RAs will massage their savings and keep them comfortable in retirement.
Stronger rand and relaxed lending criteria to strengthen property market
“Relaxed lending criteria and a stronger rand should assist the ailing South African property market in making a turn for the better,” said eLan Property Group CEO Mark Taylor. Taylor’s comment surfaced following debate on whether or not the Reserve Bank will cut the interest rate again.
After seemingly closing shop on high loan to value mortgages over the past few months, the banks are casting the net wider and opening up origination channels for their clients. Standard Bank will now be offering clients up to 100% on deals less than R1, 5million. First National Bank is offering clients up to 95% on deals less than R1, 5million and ABSA is doing up to 90% loans on deals less than R1, 5million.
Taylor said, “This should motivate the mid-level buyer and investor to enter the market once more. We are already seeing increased market activity compared to the same quarter last year especially in the Ballito area.”
The Four Factors Buyers should be aware of
For most South Africans one of the most important long-term investments in their lifetime will be their homes; it therefore requires careful thought and consideration – a wrong decision can often be a costly one. It’s not just about buying the house you’ve fallen head over heals in love with.
“Potential buyers should be aware of four pivotal factors requiring thorough investigation prior to making an offer or signing on the dotted line. Price, budget, location and the property’s condition are critical factors to be considered before making a decision,” says Adrian Goslett, RE/MAX of Southern Africa – Assistant Regional Director. He added that real estate agents marketing the home will have the required information at hand.
CONDITION OF HOME
“Investigate the condition of the home when you visit the show house – be sure to inquire if the home has any structural issues. Ask about the age of the home – roofs have a life expectancy of between 15 – 50 years and further investigate whether plumbing and electrical infrastructure has been replaced or updated.
“The exterior and interior appearance of the home will provide insight into whether sellers placed the home’s maintenance on the agenda. If you plan to buy a newly constructed home these factors should not pose a problem – there will usually be a window period where the developer will allow for any repair work to be undertaken at no cost,” he says.
Another important factor to consider is the location. “Good real estate investment is always about location. Look for a property with curb appeal in a good area.” says Goslett.
“Financial lending institutions recommend that you budget one third of your monthly household income on your mortgage repayment. It’s critical that you remain able to comfortably afford these repayments.
“Banks, financial planners and bond originators can best advise you on your long-term investment and the different solutions available,” he says.
“The asking price of homes usually has little to do with the actual value of the home. It’s important to evaluate and compare the prices of similar homes in the area to establish if the property is priced correctly.
Also investigate the original price paid by the seller – this is a good indication of whether the neighbourhood is performing well as a prime investment area.
House Price Deflation Continues to Slow Down
The information in this article is courtesy of Business Report (Absa: House prices set to rise again – 7 October 2009)
The latest Absa house price index showed that nominal year-on-year price deflation in the housing market has slowed down even further in September 2009.
Jacques du Toit, Absa’s senior property analyst, believes that if these trends continue, South Africa might see house prices rising in the near future.
On a month-on-month basis, prices continued to rise in September after reaching a lower turning point in April this year.
Absa said that middle-segment house prices were down by a nominal 0.3 percent year-on-year to R966,300 in September 2009, from a revised -1.1 percent year-on-year in August.
On a monthly basis, house prices increased by a nominal 0.8 percent in September, from a revised increase of 0.9 percent in August.
Absa said that by September, the average house price was 3.4 percent up on the low reached in April 2009.
In real terms, house prices in the middle segment were down by 7.1 percent year-on-year in August (versus -8.2 percent year-on-year in July).
Prices of small houses (80m-140m) were a nominal 4.2 percent year-on-year lower in September (versus -4.4 year-on-year in August after revision).
“This brought the average nominal price of houses in this segment to about R651,400 in September,” Du Toit said.
With regard to medium-sized houses (141m-220m), the average nominal price declined by 5.2 percent year-on-year in September (versus -4.7 percent year-on-year in August after revision), which brought prices in this category of housing to an average of R901,700.
According to Absa, this translated into a real price decline of 10.4 percent year-on-year in August (versus -10.2 percent year-on-year in July).