First-Time Investors Guide 2020 2020 - Page 12

Step 1 : Why buy now ?
Many economists don ’ t expect interest rates to rise anytime soon as global economies are trying to revive themselves . Still , at some point , interest rates will increase again , and you need to be prepared for it .
As a property investor , you need to be able to carry increased bond payments when interest rates are higher . It is essential to be aware of where interest rates are currently , where they are likely to move and plan for it as much as possible . In other words , you need to hedge yourself against high interest rates . But how ?
One way to protect yourself is to build up your reserve fund . If you have a healthy reserve fund , it should be able to carry your higher monthly shortfalls while interest rates are high . This is still not ideal as it costs you more money to have your property portfolio but remember , property investment is about long-term cycles , and you want to ride the cycles and use them to your advantage .
When interest rates are high , it becomes difficult for property owners with mortgage bonds ( most property owners ) to own their property . The market can often be flooded with stock , turning the property market into a buyer ’ s market with ample opportunities to buy bargains . So , when times are tough , and interest rates are high , you want to be in a position where you have cash available ( a healthy reserve fund ) to take advantage of the opportunities available .
It is thus critical to build up reserves in a low-interest-rate environment and not spread yourself too thin . You can even refinance your properties and keep that capital in your access bonds as reserves . We discussed this principle in a previous article , 5 Points to Keep in Mind when you Refinance Property .
If you are prepared for high interest rates , you can also acquire bargain properties ( far below market value ) if you have sufficient capital . In our previous article , Ready , Set , Negotiate , we discussed how you can buy property below market value from sellers in financial distress , which is often caused by high interest rates .
Another way to protect yourself against high interest rates is to fix your interest rates with the financing institutions . This means that if interest rates increase , your interest rate will remain the same . The benefits of a fixed interest rate are certainty and protection against interest rate hikes .
It ’ s like getting insured against future interest rate increases . But it comes at a price ( and sometimes a hefty one ). Usually , when banks offer a fixed interest rate , it will be at a higher rate than a variable interest rate . Therefore , if interest rates do not increase drastically , it will cost you a lot more to have fixed your interest rate . It is also good to remember that you are competing against some clever banking analysts …
Fixing your interest rate is almost like taking out insurance ; you are paying a monthly premium in case something goes wrong . The question you need to ask yourself is whether paying the premium is worth the protection . What do you think ?
AUHTOR BIO : Jaco Grobbelaar
Jaco Grobbelaar is the Managing Director of Prosperity Enterprises , a property investment , structuring and education company . Prosperity Enterprises simplify investing so you can live a balanced and financially free life .
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Step 2: Affordability & Personal Finance Step 2: Affordability & Personal Finance How to Save on Your First Home Government Subsidy Makes Buyers’ Dreams Come True Affordability has long been a concern for prospective homeowners, but with the current record-low interest rates and subsidies such as FLISP, there are now more opportunities than ever to invest in property. Potential homeowners earning less than R22 000 a month need not miss out on the golden opportunity to buy their first home while the interest rate is at its lowest in over 50 years. It’s now common knowledge that South Africa is currently seeing the most favourable lending environment in decades. But what is not as widely known is that many potential buyers, who would ordinarily not qualify for a bond because of their monthly income, can qualify for a government subsidy that could make their dream of owning a home come true. “Very few potential home buyers know that if they meet the criteria, they are guaranteed a once-off subsidy, known as a Finance Linked Individual Subsidy Programme (FLISP), ranging from R27 960 to R121 626, depending on their income,” says Jenny Rushin, BetterBond National Development Manager. Already, first-home buyers are taking advantage of the low interest rate, as well as the raising of the transfer duty threshold to R1 million, with BetterBond reporting that 70% of its bond applications for the past three months have been first-home buyers. Many of these buyers were unsure of how to apply for FLISP, or whether they even qualified. Says new homeowner, Theo L: “When I first heard about the subsidy, I couldn’t believe it was real. We had put money aside for the transfer fees and, with the approval of the subsidy, we could instead save that money and put it towards other expenses for the house. It was a great surprise.” Rushin says FLISP can be used as a deposit to reduce the purchase price of the home, or added to an approved home loan to allow for the purchase of a more expensive property. For example, an applicant earning R15 000 a month would qualify for a FLISP subsidy of R61 300. Based on this income, the applicant could qualify for a bond of around R580 000, at the prime lending rate of 7%. With the FLISP subsidy, the buyer would pay only R518 700 for the same property. This saving could be used to pay in an additional amount on the bond, thereby reducing the bond repayment period. Who qualifies? If you have an income of between R3 501 and R22 000 a month, and you meet the requirements, you will qualify for this once-off subsidy, says Rushin. The key criteria include having a financial dependent, be it a child or a spouse, and being a first-time home owner. The applicant must also be a South African citizen. How do Home Loans Work Exactly? The home loan makes property ownership a realistic option for those who might otherwise have perceived it as a distant dream. So how does a home loan work and how do you go about acquiring one? What is a home loan? “This subsidy is ideal for home buyers who have historically struggled to secure a home loan because their income was too low for bond finance, but too high to qualify for government housing schemes. FLISP bridges the gap between these two finance options,” explains Rushin. Simply put, a home loan is when a lender, usually a bank, lends you the money you need to cover a home purchase. It’s good to know that, if you find your dream home, you have a way of obtaining ownership of it without having to pay the full price of the home up front. A home loan means you pay the price of the home back in monthly installments, usually over the course of 20 or 30 years. It’s important to remember that your bond needs to be approved before you can apply for FLISP. “The good news is that the money is there, and if all the requirements are met, FLISP will be paid. Everyone who qualifies will get it,” adds Rushin How does a home loan work in terms of repayments? Every month you pay back a portion of the loan along with interest. The amount of interest you pay depends on the prime interest rate, the interest rate of the home loan, and other factors such as whether you opted for the 20 or 30 year bond (the 30 year bond means you’ll pay more in interest on the loan). Why use a bond originator for a government subsidy? Basically your home loan interest rate is determined by how much of a risk the bank considers you to be. There are ways to mitigate this, such as paying a larger deposit or improving your credit record, which will result in lower interest rates, saving you money in the long-term. BetterBond will apply to several banks on the applicant’s behalf to secure the most favourable interest rate for the home loan. Once the application has been approved in principle by one of the banks, BetterBond can submit the FLISP application, along with the supporting documentation, directly to the National Housing Finance Corporation on their behalf. When the subsidy is approved, the money is paid directly towards the bond or to cover the deposit. No money is transferred into the applicant’s personal bank account. Says Rushin: “With the additional funding, it’s possible to qualify for a home valued at more than a FLISP applicant would otherwise have been able to afford. Although, it is still advisable to purchase a property that is still well within their means.” What can you buy with FLISP? When using FLISP to buy or build residential property, a client can choose between development housing projects or the open market. This means that they can buy an old or new existing residential property, a piece of vacant land that is linked to a home builder registered with the National Home Builders’ Registration Council (NHBRC) or they can build on a serviced residential stand that they own themselves, and that is linked to a NHBRC home builder. “This once-off subsidy will go a long way to ensuring that even more first-home buyers make the most of the current lending environment,” says Rushin.  Sources BetterBond You can use ooba Home Loans’ Bond Repayment Calculator to determine what your monthly repayments are likely to be, as well as the total amount you’ll pay over the course of the bond term (which will be higher than the value of the home loan because of interest). Applying for a home loan You apply for a home loan after you and the home seller have signed the offer to purchase, a deal which dictates terms that you and the seller have to fulfill. So what criteria does the bank use when deciding whether to grant your home loan application? The lending criteria varies from one bank to another, but one critical aspect that they all investigate is your credit record. The deposit Home purchases often require you to pay 10% of the home value up front. This is referred to as the deposit. Banks are trying to attract more first-time buyers by offering a 100% home loan - a home loan that doesn’t require a deposit, since younger home buyers are less likely to have the required funds for a deposit. However, if you do have the funds for a deposit, it’s recommended to pay even more than 10% if you can. The higher your deposit, the better your chances of home loan approval and the lower your interest rates will be. Higher deposits take away some of the risk for the bank, making them more likely to grant you a favourable package. Why you should apply through a bond originator A bond originator, also known as a home loan comparison service, such as ooba Home Loans, can be a powerful ally when applying for a home loan. They submit your home loan application to up to nine banks, including your own, and liaise with the banks on your behalf. They provide you with quotes from each bank so you can see which ones are offering the best deal. This can save you significant resources in the long-term, as you may find that one of the banks is willing to offer you lower interest rates than your own. Sources Ooba 12 FIRST-TIME INVESTOR FIRST-TIME INVESTOR 13