Real Estate Investor Magazine South Africa August 2013 | Page 28

FINANCE

BY KOOS DU TOIT

Your Success
Starts with the right finance

M

any investors, realising the power of
gearing (borrowing money to invest
in an asset) and the spectacular
returns that it delivers, step into a common,
but entirely avoidable, pitfall: failing to find
the right finance. This includes the failure
to get a mortgage bond approved and thus
abandoning t heir investment pla ns, or
accepting any finance offered, even when this
finance comes with a high interest rate and
unsuitable terms and conditions.

What is the right finance?
While gearing is a powerful force in creating
wealth, the right gearing or, in the case of
propert y investment, the right mortgage
f inance, is absolutely crucial to property
investment success, because the finance terms
have a significant impact on both the investor’s
cash flow and the return on investment.
So what is the right finance? Preferably, it is a
100% bond at the prime interest rate or lower,
offered with suitable terms and conditions.
The prime interest rate currently stands at a
30-year low of 8.5%. At such a low, an offer of
prime + 2% may not sound too bad, but when
interest rates increase – as they inevitably do –
this interest rate may well leave an investor with
bond repayments that are simply unaffordable.
And interest rates, like all economic variables,
rise and fall in relatively predictable cycles.
While the time period it takes to complete a
cycle and the extent of the interest rate hikes
and cuts may vary from one cycle to the next,
depending on a host of economic variables,
long-term data clearly shows how the cycles
inevitably turn over time. In fact, the average
fluctuation during normal interest rate cycles is
600 basis points.

Build in a buffer
Whatever the current interest rate, smart
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August 2013 SA Real Estate Investor

investors calculate their cash flow projections
on a 12% interest rate (the long term average)
before buying a property. This allows them to
build a buffer against interest hikes without
impacting their cash flow and jeopardising the
long-term success of their property portfolios.

Getting the right finance
As a result of the global credit crisis and the
implementation of the National Credit Act, it
is not as easy to obtain mortgage finance as it
was some years ago. But it certainly does not
mean that it is impossible. Unfortunately, many
investors simply give up when their application
for 100% mortgage finance is rejected by a
bank and, subsequently, discard their property
investment plans. Or, perhaps even worse,
they accept finance at high interest rates or
unsuitable terms and conditions.

Reality check
The latest statistics show that the monthly home
loan approval rate now stands at around 70%
of applications, although only around 35% of
applications for 100% home loans are being
granted by the banks. This is because the banks’
deposit requirements remain steep at an average
of around 17% of purchase price.
However, there is some good news. Statistics
also reveal that almost 30% of home loan
applications declined by one bank are approved
by another. Over the last year, there has also
been an increase of around 25% in the number
of applications being approved by another

financial institution after being declined by
applicants’ own banks.
This means that investors should not simply
abandon their property investment plans if
their own banks or another institution declines
their application for finance. The banks are still
lending, but investors must ensure that their
applications comply with the banks’ stringent
criteria in terms of affordability and acceptable
security, that their cash flow can indeed support
the repayment of the loan and that the value of
the property – as the security for the loan – will
cover the outstanding loan should the investor
default or sell.

The shortcut
In doing so, investors will find the services of a
professional bond originator that specialises
in buy-to-let property, such as P3 Bonds,
indispensible. Such a bond originator will
assist an investor to obtain the right finance,
by approaching multiple lenders with a viable
proposition that is thoroughly and accurately
motivated, neatly and correctly presented, and
respects the banks’ different lending criteria, and
will also assist investors to scrutinise and compare
different offers, to negotiate where necessary and
to ensure that only offers that contribute to their
property investment success – at the right interest
rate and terms and conditions - are accepted.

RESOURCES
P3 Investment Group

www.reimag.co.za