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Home buyers need to know where to keep deposits under new law

MAIN IMAGE: Jackie Smith, head of Buyers Trust, Peter Mennen, Head of Legal at TPN Credit Bureau

Staff writer

Seeing that the new property laws have come into effect under the Property Practitioners Act (PPA) at the beginning of this month, both homeowners and the property industry at large now have new options available to them when choosing how to manage their deposit.

These changes affect both homeowners and the industry at large, with one of the most significant changes being centered around trust accounts. Explains Jackie Smith, head of Buyers Trust – a subsidiary of ooba Group: “Property practitioners (estate agents) can now be exempt from having to have a trust account should they meet certain conditions.”

A trust account is a special type of bank account opened to amongst other things, to hold the deposit owed on a property purchase. Trust accounts can generally only be operated by an attorney or an estate agent.

“In the past, estate agents kept buyers’ deposits in an interest-bearing account and were required to undergo annual audits and pay for accrued bank fees. In addition, they were privy to potential cybercrime threats that put the deposit amount at risk, with the most common in the industry being phishing schemes,” she adds.

Need for deposit

While heightened competition amongst the major banks has seen a strong uptick in zero-deposit home loans, Smith still believes that homebuyers with deposits have the upper-hand. “Deposits –most commonly 10% of the purchase price – are seen as a show of commitment and can increase your odds of being approved for your home loan at the best possible interest rate.”

The ooba Group’s Q4 results for 2021 underpins this sentiment. “Our findings show that second-time home buyers who, unlike many first-time buyers, have the funds necessary to put down a deposit, are enjoying more favourable interest rate discounts on their home loans.  During 2021 the average interest rate achieved in this segment was prime less 0.42%.”

Managing deposits

Smith dispels a common misconception: “You don’t pay the deposit directly to the home seller. It’s put into a trust account and kept safe until the property transfer and registration process is complete. Furthermore, if you elect to have the deposit kept in an interest-bearing account, any interest that is generated by the deposit will be paid over to you upon registration of the property.

“In the past, homebuyers had two options for their deposits, they could either hand it over to their transferring attorney or to an estate agent. The transferring attorney is usually appointed by the seller, but buyers can negotiate to appoint their chosen attorney, if the seller agrees. Either way, you’ll want to give the written instructions to deposit into an interest-bearing account  and you should clarify what interest rate you will be paid and what costs are payable.”

Other options

Of course, the PPA has the best interests of the consumer at heart, and  buyers and sellers still have the option to choose how the property deposit is managed.

One such option is Buyers Trust. “Buyers Trust works by creating an investment account with some of the country’s major banks in the homebuyer’s name, to which the buyer can directly transfer the deposit. Buyers Trust then issues a bank guarantee to the transferring attorney at no cost to the buyer. Traditionally banks charge a hefty price tag to issue a guarantee,” explains Smith.

Under Buyers Trust, buyers always receive 100% visibility of their deposits, including a competitive return on their investment and deposits are kept safe through the highest level of security measures.

“One of the greatest benefits is that there are no hidden fees. We cover everything, including the fee that the transferring attorneys are required by law to pay, from your deposit to the attorneys fidelity fund, so there are no additional charges” she concludes.

Auditing

According to Peter Mennen, Head of Legal at TPN Credit Bureau, a property practitioner’s trust account must be audited on an annual basis and the details of the auditors made available to the authority. However, property practitioners whose business turnover is less than R2.5 million a year, do not need to be audited and can instead have their financial statements reviewed by a qualified accountant.

“The new act also makes provision for property practitioners who don’t receive money into their trust accounts, in which case they can apply to be exempt from an audit, nor would they even need to have a trust account.

“The Act broadens the definition of a property practitioner substantially to include anybody, who for the acquisition of gain or remuneration sells, leases or manages property, including commercial and residential sales and rental agents, property and business brokers and property auctioneers. It also includes property and asset and portfolio managers who manage properties on behalf of another party.

“Although further clarification is required, it appears that mortgage or bond originators do not fall under the definition of a property practitioner – bond brokers have been excluded should they be defined as a financial institution in terms of the Financial Sector Regulation Act, Mennen said.

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