Buying your first home? No deposit or legal fees?

Free service available to arrange it before you buy

Many first-time buyers are faced with the impossible task of saving for a deposit before they buy their first home. Buyers are advised to open a savings account and put away money each month for a year or two, and then use that as a deposit for when they buy their first home.

The problem is that after 12 or 24 months of accumulating savings for a deposit, the price of the property may have gone up and the buyer may feel frustrated and become despondent because they are working towards a goal they can’t seem to reach.

3 reasons why a deposit is like cash in hand and helps the buyer to close the purchase deal

The first reason – The availability of a deposit is encouraged.

Sellers prefer a to sign a purchase agreement with a buyer that has a deposit to put down. It demonstrates a serious and committed buyer.

The second reason – It’s easier to convince the bank if you already have a deposit.

The debt exposure to the bank, also called loan to value, is improved and this reduces the risk of lending money to a buyer. The buyer may also be able to negotiate lower interest rates with the bank due to the reduced risk associated with the loan and the availability of a deposit.

The third reason – A deposit can be used to cover the legal and transfer fees.

A seller would much rather prefer a buyer who has the funds readily available to pay for his/her own legal fees, rather than them borrowing it from the bank as part of the home loan (also know as a “cost inclusive home loan”).

In reality, as per the barometer, only 52 %  of buyers are successful to raise a “cost included” home loan approval. The recent increase in the prime lending rate to 8.25 % will not make it easier for a buyer to obtain a home loan with all costs included. To buy a property of R 700 000.00 and pay the transfer, legal and the bond registration costs of the same home loan amount will cost the buyer close to R 44 000.00. Often first-time buyers do not have the saved funds readily available and end up not being able to buy a property.

Buyers are then restricted to buy only in a new development and such a transaction can include all transfer and bond registration fees. The option of the buyer is then restricted towards a section of choice. Often the “development” units are sold off plan and the buyer should wait 18 – 24 months (or longer) before they are able to move into their new home.

Our experience is that first-time buyers want to move into their own homes as soon as possible after signature of the sale agreement and home loan approval. They also want a wider choice of properties to buy, in the so called “open market” and not be restricted to only buying in a new development that will delay occupation, says Meyer de Waal, a conveyancing attorney of Cape Town.

It all changed on 1 April 2022

With the change in the FLISP subsidy policy as from 1 April 2022, buyers can now use their FLISP subsidies for a deposit, or to pay their legal fees. First time buyers who meet the FLISP qualifying criteria can now establish in advance the subsidy they may qualify for and then receive assistance and guidance on how to apply.

Increase your buying power

The subsidy can be used as a deposit to increase the purchase price. A first-time buyer who earns R 19 900.00 may qualify for a home loan of R 700 000.00 if the home loan is calculated over a repayment period of 20 years and the current prime lending rate of 8.25 %.

This buyer, who earns R 19 900.00 per month may qualify for a FLISP subsidy of R41 168.00 They can use this subsidy to buy a property of R 700 000.00 plus R41 168.00, thus a total purchase price of R 741 000.00, (if the purchase price includes all legal transfer and bond registration fees)

100% Bond approved – Use the subsidy to reduce the home loan debt

If the home loan approval covers the full purchase price and transfer costs, the subsidy of a buyer who earns R 19 900.00 per month can request that the FLISP subsidy be paid back into the home loan and reduce the home loan debt. The home loan of R 700 000.00 will be reduced with R 41 168.00 and the home loan debt will amount to R 658 832.00. The monthly instalments will also be reduced from R 5 964.46 to R 5 613.68, resulting in savings of R 350.78 per month.

Savings over 20 years:

If the home loan is calculated on a 20-year repayment, the R 350.78 saved over 20 years amounts to a saving of R 84 187.20, which is almost double the FLISP subsidy amount received.

Improve your home loan negotiation power – use the FLISP subsidy as a deposit and apply for a lower home loan

If the purchase price of the property is R 700 000.00, then the FLISP subsidy can also be used as a deposit to reduce the home loan amount applied for. This will make it easier for buyers to qualify for a home loan. Based on an income of R 19 900.00 (to qualify for a home loan of R 700 000.00), the subsidy amount is R 41 168.00. The home loan of R 700 000.00 will be reduced with R 41 168.00 and the home loan amount will be R 658 832.00. To qualify for a home loan of R 658 832.00, a lower income of R 18 700.00 is required, calculated on a repayment of a 20-year term at an interest rate of 8.25%.

It thus means, that more buyers will have access to buy their own first home of R700 000.00. A buyer with an income of R 18 700.00 can also qualify for a FLISP subsidy of R46 752.00

Use the FLISP subsidy to pay legal transfer and bond fees

As only some property sale transactions include transfer and bond registration fees, this limits the range of properties a first-time buyer can buy. The FLISP subsidy can be used to pay the legal transfer and bond registration fees. The buyer will have a larger “pool” of properties to select and buy from, if purchased in the open market, such being from private sellers. The buyer must pay for the legal transfer and bond registration fees if purchased from an existing homeowner in the open market. The transfer fees for a property transfer of R 700 000.00 can amount to R 22 662.00.

And the fees for the registration of a home loan up to R 21 634.00.

Add this all together (R 22 662.00 and R 21 634.00) and the buyer must have R 44 296.00 available and payable as an upfront fee, before the transfer can be registered on your name. A FLISP subsidy can now be used to pay towards the expenses of the legal fees of a buyer as from 1 April 2022.

The FLISP subsidy application must be prepared correctly to avoid delays.

The turn-around time to approve a FLISP subsidy from submission to approval can be up to 21 working days or longer (depending on where and how you submit your application). Once provisionally approved, there are still a few steps in the administrative process to be followed to ensure that the FLISP subsidy is paid out on time. To use the subsidy to cover legal fees, the buyer should prepare all the supporting documents to avoid delays in the FLISP subsidy application.

Check before you buy

Free service available to check your subsidy amount before you buy.

First -time buyers want to know where they stand to qualify for a subsidy before the go out “house-hunting”. They want to have the comfort of knowing exactly what they qualify for and how they can use this FLISP subsidy to structure their finances, whether they use it as a deposit or as legal fees. We concluded a MOU with the NHFC to assist first time buyers with their FLISP subsidies and are now able to provide a free service to all first-time buyers to who want to find out if they qualify, says De Waal.

Once it is established that a buyer qualifies for a FLISP subsidy and the subsidy amount is determined, this free service expands to calculate how the subsidy can be applied for, either as a deposit or for legal fees (or both), and then the property finance the first-time buyer can qualify for.

Click here to be directed for to the online FLISP Calculator.

Meyer de Waal

May 2022

Meyer@mdwinc.co.za
https://flisp.co.za/
021 461 0065

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)