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Should I take out a building loan?
Mputla writes:
I am 32 years old and both my wife and I earn an income. We have two children. In 2016 we bought a vacant land in a security estate with cash as we had saved for several years. We are supposed to build within four years and our plan was to save enough money to build without financial help from the bank.
Currently we are saving R13 000 a month and we have about R200 000 saved. We have had plans drawn up and the building quote is R1.5 million. At our current savings rate we will not have enough money to build within four years. Should we consider going to the bank now and financing the building or wait until the fourth year to get the finance? Or should we just save until we have enough to build?
City Press replies:
While it is admirable to try and not incur debt, borrowing money to buy or build a home would be considered “good debt” as long as you could comfortably afford the repayment. If you wait until you had enough savings, that would take you about eight years and by then the building costs would have risen.
The key would be the amount that your bank is willing to lend to you. It should be noted that banks are more conservative with building loans as the risk is higher. If you were unable to complete the build for some reason and defaulted on the loan, the bank would find it very difficult to sell a half-built house to offset the outstanding debt. Hence, they will require a higher deposit.
In this case the bank approved a R940 000 loan. This would be a repayment of just under R10 000 per month. Considering that you are saving R13 000 a month already, that would be a manageable repayment and should not put you under any financial pressure. If you were able to, you could even pay a higher amount each month and pay the mortgage off sooner.
This loan, however, leaves you with a shortfall of R560 000. Either you would have to lower the specs on your building plan or save for a while longer. At your current savings rate you would need to save for another two years. The good news is that it would be in time to meet your four-year deadline.
By Marius Marais, CEO of FNB Home Loans
If you are fortunate enough to own a piece of land in an urban area or prefer to buy a stand and build the house of your dreams from scratch, there are a few important factors to consider when applying for a building loan from your lender.
Although the process of securing building finance differs slightly from a traditional home loan, it is still governed by the National Credit Act and the same banking policies and lending criteria still apply.
When applying, you will need to use one of the channels available and ensure you have the following documents:
•A quotation from a builder who is registered with the National Home Builders Registration Council (NHBRC)
•Building plans and a supporting schedule of finishes
•A contract between the builder and yourself
Furthermore, a minimum 10% deposit which takes into consideration the value of the land and in addition a contract amount may be required upfront.
Once the building loan application has been approved, the land transferred into your name and the bond registered, there a few important factors that you need to take note of.
•The loan will be offered in stages, through progress payments, until the building has been completed. The facility will then be converted to a normal 20 year home loan.
•Building must commence within 3 months after registration of the bond and completed within 12 months to avoid penalties.
•The building contractor should be insured for unforeseen events through Contractors All Risk Insurance Cover for the duration of the project. The onus falls on you to take out Home Owner’s Cover once the building has been completed.
•The builder must enrol the project with the NHBRC which provides a five-year warranty over structural defects from the date of occupation.
•It is your responsibility to ensure that the builder understands and complies with all the bank’s conditions of the loan.
•Prior to any progress payment being paid out by the bank, a valuer should inspect the building progress and report back to the bank.
•You can apply for progress payments at any stage during the construction process provided that sufficient work has been completed and the bank is satisfied with the progress. A maximum of six progress payments are often allowed, based on the work completed. Additional progress payments will attract a fee.
•You need to pay interest on the drawn building loan balance until the project is completed, with normal interest payable thereafter.
•Once the building work has been completed you need to confirm that you are satisfied and at this point you could provide a list of snags to be fixed. It is important that this is communicated to both the builder and the bank.
•A retention amount may be withheld in order to ensure that the builder completes the outstanding work.
It is advisable to consult an attorney prior to signing any agreements with the builder, as these can potentially work against you in future.
Should you decide to change the building contractor or make any drastic changes to the original plan, you need to inform your bank. The bank may re-assess the facility and either approve or disapprove the request, based on how it impacts the overall building costs and market value of the property.
Beware tracing agencies
Patrick writes
What is your advice about entities that claim they can trace funds for people who may not be aware of whhat they have. They charge a fee price ranging from R350 to R1200.
City Press replies:
The Financial Sector Conduct Authority (FSCA) has warned people about these type of operators. In some cases they are fraudulent, taking your money and never providing a service. Even if they do provide a service, all they do is contact the Financial Sector Conduct Authority (FSCA) and you can contact them yourself without any fee.
The Registrar of Pension funds provides a central database on the FSCA website to assist members of the public to ascertain through the search engine if there are any unclaimed benefits due to them.
An enquirer will be required to input basic information onto the Unclaimed Benefits Search Engine, i.e.. name, surname, identification number, fund name, name of employer, etc. in order for the search engine to check if there is a possible match. On a successful match, the enquirer will be provided with the contact detail of the fund and/or administrator.
The FSCA can only assist by providing the contact details of the relevant fund and/or administrator where after the enquirer will have to contact the fund directly and then follow the normal claims process of a fund to prove a valid claim.
Can we open an investment club?
Archie writes:
Can one run an investment savings concept over a 60 month cycle as a Pty Ltd, with a very clearly defined methodology, as an Stokvel Investment organization? Currently many stokvel’s operate on a short-term basis and we would want to look at a longer-term one. I do realize that we would include our methodology terms & conditions in our constitution.
City Press replies:
You can start an investment club in any legal entity including a Pty (Ltd). In order to be an investment club/stokvel it can only be open to related individuals, in other words people you know. So you cannot market to the public, in that case you would have to register with Financial Sector Conduct Authority.
As you point out, the details of the type of investment and length of investing would have to be contained in the constitution. The longer the investment the more emphasis you should have on growth assets such as property and shares.
Do I have to register for provisional tax?
Morne asks:
I am a PAYE tax-payer working for a company but I have rental income from an investment property and I have capital gains as the result of a sale of shares. Do I need to register as a provisional taxpayer?
City Press replies:
According to SARS, any person who receives income (or to whom income accrues) other than a salary, is a provisional taxpayer. The only exception is if your total income from all sources is less than the tax threshold (threshold for 2018 tax year: for taxpayers below age of 65 - R75 750; age 65 to below 75 - R117 300 and age 75 and over - R135 150); or the taxable income of that person (earned from interest, foreign dividends, rental from letting of fixed property and remuneration from unregistered employer) will not be more than R30 000.
According to SARS “provisional tax is not a separate tax from income tax. It is a method of paying the income tax liability in advance, to ensure that the taxpayer does not remain with a large tax debt on assessment. Provisional tax allows the tax liability to be spread over the relevant year of assessment.
It requires the taxpayers to pay at least two amounts in advance, during the year of assessment, which are based on estimated taxable income. A third payment is optional after the end of the tax year, but before the issuing of the assessment by SARS. On assessment the provisional payments will be off-set against the liability for normal tax for the applicable year of assessment.
