Buying and ‘bonding’ together

Aspirant buyers struggling to get mortgage bond approval might look at a co-ownership agreement with friends or family. The banks are quite happy to lend a hand.

Although bond applications in the first quarter of this year reached their highest level in 3 years, aspiring home owners are still struggling to get mortgages.

As a result, applying for a joint mortgage bond is becoming more of an attractive option for people trying to enter the residential property market. It is not unheard of for couples, whether husband and wife or about-to-be-weds applying for bonds, but the current trend goes beyond this – with friends grouping together to source finance and entering into joint ownership agreements.

Absa Bank’s home loans division says that it does not restrict the number of members.
Furthermore, the lending banks are looking favourably on such arrangements as an alternative to suretyships, under which recovery of debt in cases of default is often difficult. Now they prefer guarantors signing as co-owners.
In a recent poll conducted by mortgage originators, 38% of people surveyed believe that partnering with friends or relations to get a bond is a positive option. 36% of those surveyed were opposed to the option, feeling that it posed too much of a risk, and 26% believe that it should be considered but only if absolutely necessary.

Prime market for co-ownership is the first-time buyer, but it may also appeal to investor groups wishing to spread their risk. Those perceiving buy-to-let opportunities ahead as rents continue to rise are a case in point. Others thinking of taking the plunge into a coastal holiday home, where prices are at their lowest for years, may also view co-ownership with friends or family as a good bet.
However, there are some serious issues with which to contend – and a lot of ducks to be in a tidy row acceptable to the banks before a co-ownership mortgage is a proposition.
First and foremost is the need for all partners to be fully in agreement with the venture – percentage of co-ownerships, rental patterns if being shared; rates, taxes, levies and running costs/insurances and so on; letting contracts if the purchase is a buy-to-let venture; and a formal contract/partnership agreement, legally binding on all parties. The presence of a watertight contract will safeguard against default by any party.

The contract must cover such situations as the death of one or more co-owners, or if one of the partners experiences financial difficulties. Absa home loans also points out that the minimum legal age for ownership of land in SA is 21.

Ideally, the partners should have life policies with linked beneficiaries, similar to “key-man” policies in business practices. These will cover a partner’s share of the home loan if a death does occur.
Another important issue is the structure of an exit strategy – perhaps due to a partner’s changing circumstances – or even a marriage or divorce. Absa also stresses that if one or more partners in the co-ownership agreement wants out, the loan must be re-evaluated.

Meanwhile the number of mortgage bond applications in March was the highest level for nearly 3 years, reports Mortgage Plus. Nevertheless, they are still only 36% of the application volumes recorded at the peak of the market in May 2007 – which drives home just how the market has collapsed.

The welcome news is that the level of approved home loans also reached a high in March. According to ooba CEO Saul Geffen: “Ooba has experienced consistent month-on-month increases in application intake since the beginning of the year; we expect to see this growth continuing.”

According to other indicators, the average approved bond size increased 7,4% year-on-year. The average deposit as a percentage of purchase price fell 23,9% y/y to the equivalent of 15,6% of the purchase price.
The average decline ratio during March also fell – by 8,1% y/y from 52,8% to 44,7%. An additional positive indicator is that the effective overall approval rate continued to show a year-on-year increase of 5,6% to 64,5%.

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

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Before applying for a home loan you need to make sure you are properly prepared and have your expenses under control.

To improve your chances of being approved for a home loan, you should try not to take on any other big debts in the six months before you apply.

This is the advice of Hano Jacobs, CEO of the Realty 1 International Property Group. “Banks don’t like to see too many recent requests for credit clearance on your record, so this is not the time to buy a new car or furniture on a hire purchase agreement.”

“In fact, you might even think twice at this stage about taking out a new cell phone contract or applying for a new store card,” he says.

Home buyers should also do their best not to change jobs while in the process of applying for a home loan. “Lenders look for employment stability, so if your reason for moving house is to take up a new position, you will need confirmation of this from your new employer to accompany your home loan application, in addition to your salary records from your current job,” says Jacobs.

He warns that home buyers should not try to conceal anything in their financial past from the lender. “If you have borrowed the cash to pay the deposit and will have to repay it, say so. If you have had credit problems in the past, admit to these too.

“Today’s sophisticated credit checking systems will inevitably reveal the whole story, and once lenders find you have been less than truthful about one thing, they will naturally start to question the rest of your home loan application and once that happens, the chances are very good that it will be declined.”

Two further pieces of advice for home buyers, he says, are not to go on a spending spree for a new home if their home loan application is approved, and not to proceed with an application if a change in their circumstances means they will not be able to afford the repayments.

Some additional expense on a new home is to be expected, says Jacobs, but buyers should resist the temptation to splash out and deplete their cash resources at least until they have taken transfer and established the actual running costs of their new home.

“And if something should happen that makes a big change to your financial picture, such as a disabling accident or a retrenchment, for example, it is not a good idea to proceed with an application in the hope of securing the loan before the bank finds out what has happened,” says Jacobs.

He advises that if there is a good chance you will not be able to repay the debt, you should rather withdraw the application – and keep your credit record intact.

Mortgage Plus offers a wide range of advice on different bond options and further advice on the above. Please call us for further information on:

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Call us on 011.327.4489

Email: morne@mortgagepluscc.co.za

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