If you are a first-time homeowner who earns up to R22 000.00 per month, and took transfer of your new home and then only applied for a first-time homeowner [FLISP] subsidy, it is most likely that your subsidy application will be denied.
This is applicable to all first-time buyers, unless you live in the Western Cape or KZN, says Meyer de Waal of MDW INC Attorneys, whose firm assists first-time buyers to prepare and submit their subsidy applications to the Department of Human Settlements or the National Housing Finance Corporation.
In one day, we had 5 first-time homeowners who approached us for assistance with late FLISP applications.
Unfortunately, we had to explain to them that they will not be able to apply for the subsidies as they had already taken transfer of their own homes, and no late subsidy applications are accommodated for if you live and own a property in Gauteng or the Eastern Cape, thus outside the Western Cape or KZN.
The combined value of the subsidies lost by these 5 new homeowners amounts to almost R420 000.00.
These are the amounts that the home buyers could have received to reduce their debt exposure to the financial institutions if their subsidy applications were submitted in due time, says de Waal.
FLISP stands for Finance Linked Individual Subsidy Program, and to qualify for such a subsidy, the first-time buyer must meet the following criteria:
The subsidies are a once-off subsidy, which works on a sliding scale.
As an example, on an income of R3 501.00 per month, the subsidy is R121 626.00, and on an income of R15 000.00 per month the subsidy is R62 304.00. On an income of R22 000.00 per month, the subsidy is R27 600.00.
Only in the Western Cape, for a period of 24 months after date of transfer and in KZN, for a period as from 2012, are first time buyers allowed to submit and be approved for late FLISP applications if you submit your application through your local Department of Human Settlements.
“For the rest of the country, if you are late with your application, your application will not be considered,” says de Waal.
JUST THE TIP OF THE ICEBERG – EVEN BIGGER FINANCIAL LOSSES FOR A FIRST-TIME HOMEOWNER
The loss of the subsidy for a late application is just the tip if the iceberg, says de Waal, as the homeowner faces losses of thousands of Rands over the next 20 or 30 years through repaying a home loan.
LOSS NO 1 – R63 345.00
Let us look at the example of Sive [identity not revealed].
Sive earned R14 900.00 per month at the time of his home loan application in 2018 when he qualified for a home loan of R447 919.00.
The prime interest rate at the time of his application was 10 %, but yet his home loan was approved at a higher rate being prime plus 1.10 %, in total 11.10 %.
He should have qualified for a R63 345.00 FLISP subsidy if his subsidy application was submitted before he took transfer.
He only heard about available FLISP subsidies 3 years after he took ownership of his new home.
His application as denied.
LOSS NO 2 = R79 529.92
As Sive had no deposit to put down, and applied for a 100% home loan, the financial institution who approved his 100% home loan most likely loaded his home loan rate to a rate of prime plus 1.10 %.
This is most likely due to the “loan to value” and risk ratio applied for this loan.
Compare this to the recent home loan application for Mary, a domestic worker who recently, at the age of 58 and who earns under R5 000.00 per month qualified for a home loan rate of prime less 0,9 % as her FLISP subsidy was used for a 50 % deposit on the house she purchased, says de Waal. Read more about the story of Mary
If Sive could have used his FLISP Subsidy of R63 000.00 [rounded off] as a deposit and applied for a lower home loan of R384 919.00 (R447 919.00 – R63 000.00) the financial institution [the bank] that considered his home loan could have perhaps lowered his interest rate to prime, rather the very high rate of prime plus 1.1 % extra, levied for this loan.
We did some calculations on how the extra 1.1 % to be paid back on a home loan will cost Sive, says de Waal, and we were shocked at the outcome:
|Interest rate of Prime plus 1.1 %||Interest @ Prime lending rate|
|Total repayment over 20 years = R1 116 933.59||Total repayment over 20 years = R1 037 403.67|
|Extra paid R 1 116 933.59 – R1 037 403.67 = R79 529.92|
LOSS NO 3 = R268 576.53
If Sive received the subsidy of R63 000.00 and paid it into his home loan and continued with the initial monthly repayments, this R63 000.00 once-off payment would have saved Sive a further 6 years and 4 months in time to pay off his bond and a possible saving of R268 576.53
We did the calculations, says de Waal:
This all adds up to thousands of Rands lost by Sive, just because the stakeholders who assisted him never applied a duty of care to assist or inform Sive that he can apply and qualify for a FLISP subsidy of +/- R63 000.00 says de Waal.
EXAMPLE NO 2: LARA’S HOME LOAN
Lara applied and was approved for a home loan of R356 037.00.
HER HOME LOAN INTEREST RATE
At a time when interest rates are at an all-time low with a prime lending rate of 7 %, the best home loan that Lara could negotiate is 10.020 %, calculated as follows:
This means that the interest rate that Lara must pay is just over 3 % the prime lending rate.
NO FLISP SUBSIDY CONSIDERED FOR THE HOME LOAN OF LARA
If the financial institution considered a FLISP subsidy of +/- R89 363.00 to be paid into her home loan once she took transfer, then her home loan could have been reduced with a large capital reduction.
PAY OFF THE BOND QUICKER AND SAVE R 566 865.00
If Lara then continued with her monthly mortgage payments that she is used to, (up to when the subsidy should have been paid over into her home loan), she would be able to pay off her bond in 12 years and 7 months, compared to the 30 years she contracted for.
This means that she would save R 566 865.00 on her home loan and shave 17 years and 5 months years off her home loan repayments.
NEGOTIATE A BETTER INTEREST RATE WITH A 25 % DEPOSIT TO PUT DOWN
If Lara had the benefit of a large deposit of R89 363.00 and used the FLISP subsidy as a deposit, she could then reduce here home loan as follows:
Balance home loan required R266 674.00
The R89 363.00 equates to a deposit of +/- 25 % compared to the loan granted.
It is standard lending practice that a first-time buyer who approaches a bank with a 25 % deposit to put down will most likely be treated as a VIP client and receive an interest rate approval of close the prime lending rate, or even an interest rate below the prime lending rate of 7 %.
The average weighted interest rate of Lara is 10.020%.
If Lara hade a deposit of 25 % available and was able to negotiate an interest rate of 7 %, and pay off her bond over 30 years, she would have paid only R636 707.96 for her entire home loan and interest.
Her total home loans costs for a home loan of R266 674.00 plus interest would only be R638 707.96 compared to the current repayment of R1 124 812.62 over 30 years at a rate of 10.020%.
Lara would have saved as follows:
Total saving R 488 104.66
PAY BACK @ 7 % AND OVER 20 YEARS
If Lara hade a deposit of 25 % available and able to negotiate an interest rate of 7 %, that she would have paid off over 20 years she would have saved even more.
Her total home loan costs [capital and interest repayment] for a home loan of R266 674.00 would only be R496 204.96 compared to the current repayment of R 1 124 812.62 over 30 years at a rate of 10.020%, then,
Lara would have saved as follows:
Total saving R 628 597.66
Herewith the calculation:
WHO FAILED LARA?
Interesting to note is that the financial institution who approved the home loan did add a clause to the home loan approval to inform that a FLISP subsidy can be considered.
It however appears that none if the stakeholders involved, neither the estate agent, the mortgage originator, the financial institution, or the bond registration attorneys who attended to assist the buyer to become a homeowner.
If Lara has a claim for her losses, who will stand in for her financial losses?
THE ANSWER FROM LARA
When Lera was asked the question: “Did nobody advise you that you can apply for a FLISP subsidy? “
Her answer was “FLISP [sic] is something I had to find out by my self none offered, help or guidance . It was a struggle to even get an approval form the banks”
Imagine if the financial institution and the estate agent and the mortgage consultant were not chasing sales and conversion targets.
Imagine if just one of them took time to work out her FLISP subsidy, then subtracted the available subsidy and applied for a lower home loan,
Imagine if the financial institution approved her full home loan, but offered her assistance after approval and so not upset any sales and conversion targets, and assisted her post home loan approval to apply for a subsidy and reduce her home loan exposure
Imagine all the extra payments that Lara would save over 20 or 30 years.
THE ESTATE AGENT
Just recently we assisted an estate agent with a home loan application and the estate agent told us emphatically ‘Please do not submit this application for a FLISP approval”.
The Buyer met all the qualifying criteria for a FLISP approval.
When I asked the agent, “why not?”, and the estate agent replied – “A FLISP application will delay the transfer in the deeds office and I have sales targets to meet, I cannot afford any delays”.
In terms of the new Property Practitioners Act that may soon be implemented, an estate agent has a duty of care towards the Buyer.
The question is to be raised, what duty of care did the estate agent apply when assisting Sive with the preparation of the offer to purchase and the structure of the property finance layout and application?
THE MORTGAGE ORIGINATOR
The home loan application was processed by a mortgage originator and this mortgage originator had a comprehensive overview of the financial situation of Sive.
The same “duty of care” question can be directed to the mortgage originator.
Just recently, we were advised by a leading mortgage origination group that they try to steer away from submitting FLISP applications as these applications delays the registration process in the deeds office and this caused reputational damages to their own brand and working relationship between the Seller and the estate agents that supply them with new home loan applications.
THE FINANCIAL INSTITUTIONS
The buck most likely stops with the financial institutions.
These institutions assess the risks of a new home loan applications.
Based on the credit profile, the affordability, the debt vs income ratio and the loan to value and other factors that may influence the institution, they make a call on the home loan and interest rate to be approved for the first-time buyer.
If an available FLISP subsidy is not considered to be paid into the home loan to reduce the loan to value exposure and overall risk of the lender, how can it be argued that the financial institution applied a duty of care towards its new client, the first-time homeowner?
The institution is most likely the first to act against their client if he or she fails to keep up with the regular mortgage instalments but failed to consider that the debt exposure of their own client could have been of lesser risk to the institution if a FLISP subsidy was paid into the home loan and reduced the debt exposure.
If Sive received a FLISP subsidy of R63 000.00, he would have been able to contribute close to a 14% deposit when buying his first property of R384 919.00.
This substantial deposit should have influenced the financial institution to grant Sive a much better home loan rate, says de Waal.
THE CONVEYANCING ATTORNEYS
The conveyancing attorney firm that attends to the registration of the mortgage bond is most likely the last stakeholder in the home loan process to be able to ask the new home buyer if he or she applied for a FLISP subsidy or received any assistance and if the process is in place.
This due the reality that once the property is transferred on the name of the new homeowner, you cannot apply late for a FLISP subsidy, unless you live in the Western Cape or KZN.
POSSIBLE CLASS ACTION
With so many first-time homeowners receiving the negative news that they are too late to apply for a FLISP subsidy, we have been requested to investigate the possibility of a class action or legal action against the stakeholders who failed to perform their duty of care when dealing with the first-time home buyer in the home buying process, says de Waal.
We await feedback and comments from financial institutions, estate agents, mortgage originators and conveyancing attorneys.
Feedback can be directed to Meyer de Waal firstname.lastname@example.org
Meyer de Waal
Director MDW INC
021 – 461 0065 – 083 653 6975
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)