Importance of financing: Borrow to build, renovate, extend, or buy off-plan
MAIN IMAGE: Rhys Dyer, CEO of ooba Home Loans; Jackie Smith, Head of Buyers Trust
Property practitioners worth their salt will be knowledgeable about the several ways to finance a prospective client’s dream home. This kind of advice will not only be in the interest of the buyers but will enhance the trust instilled with the buyers when the practitioner can advise them on the best way to finance their home within their own budgetary guidelines.
There are various options to consider when searching for a dream home and property practitioners should know these by heart. While some buyers prefer existing homes – perfectly matched to their needs and requiring no major updates – others may want to buy off-plan, build from scratch, renovate, or even extend a property.
Rhys Dyer, CEO of ooba Home Loans, says that in a competitive buyers’ market, there is something for everyone and all the options available to them should be compared.
“In a prolonged buyers’ market, there are plenty of options available to customise your dream home to your exact specifications. This also allows you to cash-in on a higher return later down the line when selling.”
Jackie Smith, Head of Buyers Trust, a subsidiary of ooba Group, says there are four qquestionsto be asked when considering buying a house.
“Many buyers look to property professionals as their first point of contact to provide them with guidance and information as they consider house buying. Property practitioners are committed to the interests of both the buyer and seller. However, buyers must be responsible and educate themselves on the financial and legal implications that come with signing an Offer to Purchase (OTP).”
Smith emphasised the following four questions:
- Have you calculated your long-term affordability?
- Do you have a deposit and where would you like it to be kept?
- Do you have money set aside for the extra costs involved?
- Do you understand the terms of the OTP?
Dyer says there are many factors to weigh up when considering these options – one of the most important being centred around finance.
Dyer breaks down the financing options available as follows:
Building loans explained
“A building loan is used to finance the construction of a home on vacant land, or to finance renovations and/ or extensions to an existing home. Unlike a home loan, the bank pays out the building loan in stages and only as each phase of construction is completed.”
The application and approval process for building loans is like that of standard home loans so it is strongly advised that homebuyers work alongside a credible bond originator throughout the process.
When applying for a building loan, Dyer explains that you will need the following:
- A credit record of 620-plus: Check your credit score using a free online service.
- Draft plans for the construction taking place: This includes approval by the municipality, the materials being used, and the budget assigned to each portion of the project.
- A signed agreement: Between yourself and your contractor of choice.
- Proof: The banks require proof that the contractor is registered with the National Home Builders Registration Council (NHBRC) and is covered by Contractor All Risk Insurance Cover.
- A deposit: It is advisable to have a deposit of around 10% in place should you not be approved for a 100% home loan.
- A lien waiver: This is provided by the builder to confirm that they waive all rights to the property, any materials and labour used during construction.
Should you wish to renovate, extend a home, or even install alternative energy such as solar power at your existing home, you may need to apply for home loan refinancing.
“The home will be revalued, and your credit history and affordability will once again be reviewed. If you are borrowing a portion of the original home loan or accessing funds registered for future use, the funds will be made available immediately after approval. Alternatively, should you wish to register a second bond, the funds will be payable after the bond is registered at the deeds office, which could take up to six weeks.”
Important to remember is that further costs will be involved when registering a second bond. This includes a second bond registration, VAT, and the deeds’ office levy.
More South Africans are looking to sustainable energy solutions that offer long-term cost savings – not forgetting a higher return on investment when you do decide to sell. And while homeowners have expressed interest and see the clear benefits, finance has been a key barrier to entry.
Dyer explains: “New-build homes, also known as buying off-plan, are appealing to buyers for several reasons. For starters, repairs and redecoration costs should be minimal for the first few years and, if the property is built to the correct standards, homeowners can enjoy lower running costs and energy bills.”
Other benefits when applying for an off-plan home loan include no transfer duty costs and reduced VAT payable. Transfer duties are only paid when a property changes ownership. However, in the absence of transfer duty, you will be required to pay VAT which will still be less on a new build than if you were buying an existing property.
Dyer says that the home loan application process for an off-plan property works in the same way as a standard home loan application process. With all the options available to buyers today, he believes that now is a suitable time to a finance a home – no matter your preference. “
According to Smith OTPs are legally binding and massively expensive for a buyer should you try to back out from the deal after signing. Therefore, buyers must ensure that they are adequately informed and prepared for the decision they are about to make.
“Long-term affordability is the most important issue to consider,” stresses Smith. “If a potential buyer cannot afford to finance the purchase of the property at a particular price-point long-term, it would be irresponsible for them to go further.
“As a buyer, your property practitioner will be able to explain the OTP carefully to you so you understand what you are going to agree to before you sign,” says Smith.
Finally, the property practitioner will be able to help stipulate any conditions in the OTP that need to be fulfilled before you can complete the transaction. These could include the sale of your current home, or that the purchase is subject to your bond application being approved. This gives you time to acquire the necessary funding,” she concludes.