Building Loans in South Africa

Definition:

A building loan is a loan granted to an applicant (borrower) for the purpose of erecting a building on a vacant stand. The building loan may include the purchase of the stand.

In some cases the applicant may already own a stand (i.e. It is already registered in his / her name) and the loan will only be required to erect the buildings.

After the bond has been registered the proceeds of a building loan are paid by means of progress payments, that is, the money is advanced in stages after completion of a certain portion or portions of the building.

Requirements when applying for a building loan:

1. Completed home loan application form

2. Supporting documentation (as required when applying for a home loan) i.e. Proof of income, proof of identity, bank statements etc

3. Land & building contract

4. A copy of at least the submitted building plans i.e. already submitted but not yet approved by the local authority

5. Schedule of finishes

6. Quotes / tender from the builder

7. NHBRC Registration certificate (Builder)

8. NHBRC Builders Enrolment Certificate (Property) – prior to registration

Rate & term options:

The interest rate applicable to a building loan during the building process is normally the prime variable rate plus a risk premium. Once all progress payments have been made, the client will then enjoy the rate the bank offers.

Retention:

Once the valuer does the valuation report, he will put on a full retention on the building portion of the loan & will thereafter make progress payments. The valuer may place a full retention on the loan, requiring certain documents e.g. NHBRC certificate or unit enrolment certificate.

Progress payment:

A progress payment is a payment authorized by the client and released by the valuer to pay the builder at certain stages of the building process. It protects the client against the builder walking away with all the money prior to completion of the building.

Progress payments are normally paid out at the following (minimum) stages:

• ? Foundation
• ? Roof level
• ? Finished project

(More progress payments can be done!)

Unique Costs:

• ? Drawing plans to be approved.
• ? Minimum fee for approving building plans.
• ? Local authority rates and taxes which must be paid during the building period – even if no one is living in the property after the purchase of the stand.

Interim Interest:

The bank will only pay out for work that is completed or materials actually used and will retain adequate money for completion. There are usually three or four progress payments to the builder prior to the completion of the house.

Interim Interest will be calculated on the loans daily balance that are made up of progress payments, any costs paid out as well as previously charged interim interest. It is important that the client budgets for this – if he does not pay the interim interest, there will be a shortfall at the end when the final payment is made. The customer should make part payment as soon as the first progress payment is made, to cover the interim interest. Provision must be made to cover the interim interest that can mount up during the building period. Failing this, the client will have to pay the shortfall when the last progress payment is made.

THE BUILDING LOANS PROCESS:

• ? The completed building loan application form, duly completed by the client, plus all the supporting documents (as mentioned above), have to be submitted to bank for consideration.
• ? If the building loan is granted, the bank will instruct the attorneys to register the mortgage bond, the costs of which are payable by the client.
• ? No payments will be made to the builder prior to registration of the mortgage bond.

THE OBLIGATIONS OF THE CLIENT ARE AS FOLLOWS:

• ? Inform the builder and the bank of any problems, concerns and delays.
• ? Sign progress payments only once the client is satisfied with the work done. At own expense clients can obtain expert advice if necessary – do not rely on the bank assessor only.
• ? Repay the building loan in monthly installments (Interest is charged at Prime Lending Rate on the Mortgage Bond from date of registration until final progress payment is paid out).
• ? Sign debit orders, stop orders or other payment instructions to pay the monthly installments – these can be processed to a current or savings account.
• ? Submit the electrical compliance certificate and the certificate of occupancy.

THE OBLIGATION OF THE BANK ARE AS FOLLOWS:

• ? Provide finance.
• ? Pay the builder on instruction of the client, but sufficient funds will be retained to complete construction.

? NB: The bank will always retain sufficient funds to complete the project irrespective of how much work has been done or the current value of the property.

THE OBLIGATIONS OF THE ASSESSOR ARE AS FOLLOWS:

• ? Assess the property using the plan, schedule of finishes, specifications and the building contract.
• ? Structure the retention amount and progress payments.
• ? Monitor the progress.
• ? The Assessor will always retain sufficient funds in order for the completion of the project.

THE OBLIGATIONS OF THE BUILDER ARE AS FOLLOWS:

• ? Conclude a building contract with the client.
• ? Build according to the contract and plans.
• ? Register with the NHBRC.
• ? Enroll the property being developed and pay the required enrolment fee. This fee may be included in the contract price.
• ? Provide all-risk policy until completion of the building.
• ? Provide waiver of lien – whereby the builder waives his rights to the property upon completion.

THE FUNCTIONS OF THE NHBRC ARE AS FOLLOWS:

• ? Register the builder.
• ? Issue the builder with an enrolment certificate.
• ? Ensure defects are made good.
• ? Investigate claims and complaints made in terms of structural defects.

WHAT ARE PROGRESS PAYMENTS? (Also known as draws or disbursements)

• ? Payments made by the bank, on instruction of the client, to the builder from time to time based on the progress of the building.
• ? Payments are only made on the client’s written request on the prescribed Request for Progress Payment form, signed by the client (all the mortgagors) personally.
• ? Clients are often requested to sign the above forms up front – this should never happen, as the client will not have control over the frequency of payments made to the builder!

IMPORTANT INFORMATION:

• ? The bank does not choose the builder. The building contract is between the client and the builder, and the bank is not a party thereto. The bank will not be liable for any act or omission by the builder, nor for any loss, defect or faulty construction work of any nature, or for any digression by the builder from the plans. Even if the assessor approved the work, the client remains liable to pay the full monthly installments.
• ? The assessor is representing the interests of the bank and the purpose of his inspections or assessments, is to determine whether there is building progress for the bank’s purposes and whether the property constitutes adequate security for the loan only and not to protect the interests of the client or to inspect and point out any defects of any nature whatsoever. The client is not to rely on the banks assessor when authorizing payment. The bank will not be held accountable if there is a value shortfall between the assessment amount and the client’s independent valuation, as the assessor is protecting the interests of bank. The Assessor will always retain (hold back) enough funds to complete the project.
• ? Interest is charged from the day the first progress payment is made and it is advisable to pay all this interest as soon as possible before the first installment is due to prevent any decrease in the retention amount and an increase of the interest due. Non-payment of this interest will reduce the amount available for building purposes (this normally becomes evident at the end of the project) and the client will have to obtain additional finance to pay the builder to complete the work if there is a shortfall.
• ? The bank cannot provide an electrical compliance certificate or certificate of occupancy and is further not obliged to provide these certificates.
• ? It will be in the client’s interest to visit the building site regularly to determine if the work is done according to the building contract, building plans and applicable legislation.

? All agreements and dealings between the client and the builder must be reduced to writing.

Please contact us if you require any further information or would like to apply for finance:

Complete this short form online

011.327.4489 / 0861 1111 93

morne@mortgagepluscc.co.za

www.mortgagepluscc.co.za

HERE’S TO MAKING AN INFORMED DECISION !

With the new Consumer Protection Act coming into effect on 1 April 2011, business sectors in all industries of trade have had to re-look their level of service, ensuring that they provide their clients or customers with all necessary information to aid them in making an ‘informed decision’. The use of plain language is especially important for this new Act, as often consumers don’t truly understand what they are binding themselves to.

Here’s a short-list of words that you might come across when applying for a home loan – the first step to buying your dream home – explained in plain language. The explanations below will make filling in your Application Form a breeze. That being said, the best way to ensure that your application form is filled in correctly, you can consult a mortgage consultant who will be able to take you through the procedure step by step.

APPLICATION TYPES

Individual – One person only is applying for a home loan that they will be paying for themselves

Multiple –  Larger groups of more than 2 people applying for a home loan

Private Company – (Pty) Ltd: A small company with few private shareholders apply for a home loan in the company’s name.

Public Company – A company which sells shares publically and has many shareholders applies for a home loan in the company’s name

Trust Company – A company formed to act as a trustee or to deal with trusts. A trust company does not own the assets its customers assign to its management, but it may assume some legal obligation to take care of assets on behalf of other parties.

Private Trust – An arrangement whereby property is managed by one person (or persons, or organizations) for the benefit of another. You may find this in Family Trusts. You can apply for a home loan in the name of your Family trust.

Surety – a person who assumes legal responsibility to pay for someone else’s debt should they become incapable of paying.

SOURCE OF INCOME

Donation/Gift/Winnings – If you have been lucky enough to win the lottery or receive a hefty cheque from your long gone uncle Scrooch, be sure to indicate this on your application form.

Inheritance – If you have received any funds passed on to you by a deceased family member, you need to indicate this on your application form by ticking the “inheritance” box

Investments – Do you have any investments that are regularly profitable? Tick this box if you receive money from investments

Pension – Over 65 and receiving pension every month? If you plan on using these funds to pay off a bond, you need to indicate so on your application form.

Policy – If you have a policy that pays out any funds to you on a regular basis, you can use it to pay towards a bond.

Salary – Most applicants will apply using the funds they receive from their salary which is normally paid on a monthly or fortnightly basis.

Offer to Purchase – An OTP is a formal document in which the buyer proposes to buy a property for a certain amount and under certain conditions. Once the seller accepts this proposal, a contract is created binding the buyer and seller to the conditions.

Documents required – When applying for credit, you will get asked to submit required documentation. Each person’s application differs but the basic required documentation remains the same for each applicant.

FICA

FICA is the Financial Intelligence Centre Act, 2001. The verification process for an individual investor includes obtaining the following documentation: Without these documents, your application will not be processed at all.

• A certified copy of your identification document
• Verification of your residential address through the provision of an certified/original copy of mail delivered to your residential address or a signed Affidavit from the owner of the property
• A cancelled bank cheque or a certified copy of your bank statements (6 months)

Property valuation – Once you have made an offer to purchase, the property needs to be valuated to determine whether the amount you have offered coincides with the value of the property. If the figures are synonymous, the Approval in Principle is drawn up.

Approval in Principal – After the property gets successfully valuated, the bank will deliver an Approval in Principal which will stipulate certain conditions including the loan amount and offered interest rate. You can now decide whether you would like to accept these conditions after which a Final Grant will be delivered.

Interest Rate – Currently, the Prime Interest Rate is 9%, the lowest it has been in over 10 years! Here’s what’s to keep in mind when it comes to Interest Rate.

Fixed Rate vs Variable Rate:

The interest rate on a fixed rate home loan does not change. This type of home loan is advantageous because you will be protected from rate increases and your monthly instalment will remain consistent. However, the disadvantage is that you will not benefit when the prime rate is dropping, which has been the case in the past few years. Also, a fixed rate will usually be slightly higher than the prime rate (at the moment of your application).

Final Grant

If you have accepted the conditions set out in the Approval in Principle, the Final Grant will be issued, which is the last step of your home loan application. Signing of the Final Grant binds you to the transaction and from here transports and registration of the property are handled by the chosen attorneys.

Please contact us if you require any further information or would like to apply for finance:

Complete this short form online

011.327.4489 / 0861 1111 93

morne@mortgagepluscc.co.za

www.mortgagepluscc.co.za