Buying a home ranks as the most expensive investment people make, but acquiring that dream comes with a price tag significantly higher than the listed price – and that can affect the deposit you have so carefully squirreled away to make that vital down-payment.

Richard Gray says the transfer duty – the government tax paid to the South African Receiver of Revenue on the transfer of property – is the largest additional cost.

“Transfer duty on vacant land is calculated exclusively on the land value, but when buying an existing house, a sliding scale applies to the combined land and building value,” he says.

To minimise the costs on entry-level properties, transfer duties are exempt on properties worth up to R500 000. However, for properties priced between R500 001 and R1 million the government claims 5% of the price, after which the duty shifts to R25 000 plus 8% of the price above R1m.

Gray says transfer duty should not to be confused with transfer fees, which are essentially the attorney’s costs for transferring the property and these are levied according to recommended guidelines.

Buyers also pay about R5 000 in bank initiation fees to cover the costs of reviewing the property before the bond can be granted. Gray says if the bank needs to repossess the property for defaulted payments, the institution wants to know beforehand that the asset is worth the amount loaned.

There are also costs involved in registering the bond, again calculated on a sliding scale depending on the mortgage size. Also, the municipalities also want to ensure their share, which means buyers are levied up to five months in advance on their annual rates and taxes.

Gray says sellers must provide entomology and electrical certificates of compliance which cost about R300. However, there may be other costs involved if the home needs to be tented against bugs and white ants (R4 000) or electrical maintenance.

Meumann White Attorneys’ managing partner, Bruce Forrest, says increasingly buyers must request copies of the municipal plans for the properties they intend buying.

“Too often renovations have been undertaken without planning approval – and that means you stand the risk of buying a property only to discover you have to knock down a section because it traverses the boundary wall,” he says.

Gray says once transfer has been effected, owners must take out homeowners’ insurance and consider taking out life cover. Homeowners’ insurance covers the cost of replacing the building if it is destroyed.

“Think of turning the house on its roof – what does not move is covered by homeowners’ insurance. Life cover, often a bond condition, pays out on the death of the breadwinners or owners,” Gray says.

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The majority of first-time home buyers consist of mostly younger individuals who have limited experience of owning or maintaining a property of their own. As a result, many of these individuals are not in a position to make a well informed decision about the long-term implications involved in purchasing a home.

Seeing that investing in property has far reaching consequences, Adrian Goslett, CEO of RE/MAX of Southern Africa, offers a few tips for first time home buyers, designed to assist them in making the most well informed decision possible.

“If you are in the market to buy a home, it is important to move quickly, but do not be pushed or rushed into making a decision. Property prices are starting to increase again, with a 5% increase in property prices expected in 2010, so the sooner you can get your foot in the door of property ownership, the better. However, buying a home is a big commitment that shouldn’t be entered into lightly. Affordability is a key factor to take into consideration,” says Goslett, who notes that first time homeowners need to take potential interest rate increases into account. “In addition,” he says, “other factors such as NERSA having granted Eskom the freedom to introduce rate increases of up to 25% on electricity, needs to be taken into account when calculating the affordability of purchasing a home.”

When purchasing a home, remember that the selling price of the home is not the only cost involved in the transaction, says Goslett: “There are several added costs involved in buying a property, which can add up to a sizeable amount, including transfer fees, deeds office fees and levies, municipal rates, bank charges, bond initiation fees, home insurance costs, as well as the monthly administration fee that is charged by the bank. It is critical to include all of these into your calculations to work out how much you can actually afford.”

If you want to own your own property, start off by determining the size of home loan you qualify for. With regards to home loans, your monthly income and expenditure is the single most important factor with regards how much you can borrow to purchase a property. Goslett explains: “Loan providers work out the amount you qualify for by considering your gross monthly income minus your gross monthly expenses. As a rule of thumb, your monthly bond repayment cannot be more than 30% of your total monthly income.”

He says that there are a number of online mortgage calculators that will give you an estimate of what you qualify for, but says that it is important to note that there are no guarantees with regards to these results: “Calculators will only give you an estimate, as being approved for a mortgage involves more than just checking your income versus your expenses. Your credit history also plays a big part in whether you will be approved for a mortgage at all. As such, make sure your credit history is clean and that you have no late or outstanding bills that could negatively affect the bank’s decision.”

Goslett also notes that banks seldom grant 100% home loans, and says that first time homebuyers therefore need to have a deposit saved up. “It is important that the money for your deposit is easily accessible and readily available. If your offer to purchase is accepted, your deposit needs to be paid over into a trust account fairly quickly. If you do not have the funds available, you are at risk of the sale agreement falling through. “

Goslett says that it is best to get your affordability assessed: “Speak to a credible mortgage originator to establish the home loan amount you would potentially qualify for first. They will be able to list and explain all the costs involved in buying a property, and will be able to assist you in calculating just how much you can afford. In this way, you will know what price bracket to look at before you start searching for your first home, which can save you a lot of time and hassle.”

Bond terms can vary between 20 and 30 years, as can the interest rate granted by the bank. “Currently, the prime interest rate is 10,5%, but depending on your credit history, income and history with the bank, you can be approved for a loan that is charged below the prime lending rate. It is important for first time home buyers to understand that interest rates are not cast in stone, but are negotiable and that they can speak to mortgage lenders about securing a better rate,” says Goslett. “The banks also offer a variety of different products to suit individual requirements. Therefore first time buyers should be sure to investigate all the options to find the solution that is tailored to suit their specific needs,” Goslett concludes.
Article by Adrian Goslett – RE/MAX

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