words by nosipho balfour
Residential property, when acquired with good property fundamentals and at the right price, is an asset that increases in value over time. Freedom from paying rent to a landlord and investing that money into your own home is an avenue of creating personal wealth. Given average house prices, buying your own home can be a lengthy process that starts with putting aside money. Determining how much you can afford is a critical first step and can be done via your bank to get prequalified and pre-approved for a home loan. However, the process of buying your own home has additional costs that buyers need to be aware of in addition to just the purchase price.
The following list is not exhaustive, however, it gives you a good indication of the associated costs of purchasing a home. Doing your research, including the necessary calculations based on your budget, is the first step to peace of mind and being in control of your finances.
When you buy a house and approach your bank for a home loan your bank would do a credit analysis of your financial position to determine an appropriate credit rating/worthiness. Depending on this, they will indicate how much of the purchase price of the house they would be willing to finance. Historically banks would finance 90% of the purchase price, however, given the current economic environment and other risk factors such as the location of the property, banks have become quite tight on financing terms. In certain instances, the deposit amount can be as high as 30%. This can be a significant amount. For example, for a house that costs R1,000,000 a 30% deposit equates to R300,000. This amount is usually paid upfront and paid over to the transferring attorneys.
2. Transfer duty
Transfer duty is a tax levied by the government on any immovable property that is acquired by way of a transaction or otherwise. The basic principle of transfer duty is that the higher the value of the property you buy, the higher the percentage of duty payable. In Finance Minister Tito Mboweni’s February budget speech, the threshold for transfer duties was adjusted. Property costing R1 million or less will no longer be subject to transfer duty. This is a big win for young professionals as they will be able to actively participate in the property market in residential areas where they may have wanted to reside.
After your deposit, the transfer duty is one of the biggest upfront and once-off costs to consider when buying a property. 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.
3. Transfer costs
A transfer cost is the professional fee that the conveyancing or transferring attorney charges in a property transaction to register ownership of the property with the Deeds Office. This is paid once-off before registration and is not to be confused with transfer duty.
4. Bond costs
For the bank to make sure that they have some form of security over the property you have taken a home loan on, they will register a mortgage bond that confers certain rights on them. These fees are typically charged by the bank and can include bond initiation fees — this fee is regulated by the National Credit Act and is currently set at a maximum of R5,000. Furthermore, the bond is registered at the same time as the transfer of the property and is done by the bond registration attorney, an attorney that is usually appointed by the bank. Similar to transfer costs, the attorney will charge his professional fee for registering the bond, which the buyer has to pay. This cost is paid once-off, to the bond attorneys prior to the registration of the bond.
5. Occupational rent
On signature of a purchase agreement, the buyer and seller would typically stipulate a date by when occupation of the property will take place by the buyer. The occupation date is usually aligned to the transfer date of the property in registering it in the new owner’s name. The transfer date is guided by the estate agent and attorneys based on the time it would take to register the property at the Deeds Office. In the instance that the buyer would like to take occupation prior to transfer, occupational rental will be payable by the buyer to the seller. The amount will be stipulated in the purchase agreement.
6. Municipal Rates
These are rates charged by the municipality in which your property is registered. Municipal rates cover all the services provided to you by your local municipality. These services include sewerage, the removal of rubbish, streetlight and road maintenance.
The calculation of your municipal rates is done according to the municipal valuation of your property. Prior to signing your purchase agreement always request a copy of the last municipal rates statement to ascertain what this amount would be.
7. Body Corporate Levies
If you purchase a property within a sectional title scheme, body corporate levies are charged monthly to each owner of a section within the sectional title scheme. These levies typically cover the costs associated with running the estate such as the security, garden, pool, repairs and common property maintenance.
Homeowners insurance protects the physical structure of the property (bricks and mortar). The insurance is against an event such as fire, flood etc. The second is life cover (typically encouraged) which in the event of the death of the property owner/bond holder, the insurance will settle the outstanding bond amount so that your family is not responsible for the outstanding debt you owe to the bank.
The buyer has an option to take either of these through the bank or bond provider or through a preferred broker or insurer. Lastly, home contents insurance protects the contents of the home against loss or damage as a result of theft or burglary and extreme weather conditions.
9. Ongoing Maintenance costs
Every owner takes pride in their home and will want to ensure they keep the home in good condition. Maintenance costs can include but are not limited to electricity, water, painting and repairs.
For every homeowner planning to purchase a home isn’t a decision taken lightly, therefore being aware of the costs associated allows peace of mind. It can be daunting at first, but it always helps to seek clarity from an estate agent and bank for more information on the process.
A bond instalment is made up of the capital repayment and interest portion which is determined over the term of the bond. i.e. 25 or 30 years. When obtaining bank financing ask your bank if they offer an access facility or access bond. An access facility is where you can pay additional money into your bond account whilst retaining “access” to that extra cash.
By placing money in the bond account, you can reduce the interest portion of your bond instalment each month as it will be calculated at a lower capital amount. For roughly the first third of your home loan term, the homeowner will be paying off the interest before significantly reducing the capital amount. The benefit of putting in more money than your monthly instalment is that you get an interest cost saving.
Nosiphiwo Balfour is a property practitioner and Commercial Property Director with more than 14 years’ experience. In her most recent role she was the former CEO of Texton Property Fund, a public listed Real Estate Investment Trust with property assets, located in the United Kingdom and South Africa, valued at R5.5 billion. She currently performs strategic advisory work and serves as an Independent Non-executive Director on the Board of Communicare Social Housing NPC.