Navigating all the paperwork involved in securing a home loan can be a little overwhelming at times – particularly as a first-time buyer confronted with an array of industry jargon and cryptic initialisms.
If you feel like your offer to purchase, or home loan documents, are written in a foreign language, you’re definitely not alone. Marc Hendricks, Western Cape Regional Manager of Rawson Finance, reveals a few of the most commonly misunderstood industry terms, and explains what they actually mean in simple English.
Bridging Finance is a loan that a seller can apply for if they need money urgently and can’t afford to wait the three or so months between the sale of their property and the date of transfer. It’s a bit like an advance on a salary – only you pay interest on the money you borrow. Bridging finance is usually offered up to a maximum of 80% of the net profit of the sale (profit minus all expenses), and interest rates average at around R1.50 per R1000 per day. Estate agents can also apply for bridging finance if they need money to tide them over until they receive their commission.
Consolidation of Debt
Consolidation of debt is a service generally only available to existing bond holders, and is typically used in situations where someone has gotten in over their head with numerous accounts or loans. The idea is to pay off all your outstanding debts using money from your bond (with the permission of your bank, of course) and then repay that money as part of your monthly bond instalment at the lower interest rate of your home loan. This can significantly reduce your monthly expenses, but can be difficult to do under the regulations stipulated by the National Credit Act.
Costs or Cover Clause
In most cases, banks will not finance the transfer and bond registration costs associated with a property purchase, which means people generally need to come up with a significant amount of cash upfront in order to buy a home. For less affluent purchasers, however, that can be pretty much impossible, which is when a 100% + Cost comes into play.
Only available to purchasers with a gross household income of under R18 000 a month, a Costs or Cover Clause allows for a more-than-100% bond (usually around 104%) in order to cover transfer and bond costs.
People often get confused between equity in a bond, and equity in a property. Equity in a bond is the amount of additional money you’ve put in, above and beyond your minimum repayments. This can be withdrawn if you have an access facility. Equity in a property, however, is the amount by which your home’s value has increased since your loan was granted. If this amount is significant, you could potentially convince your bank to increase your bond accordingly.
Guarantees are typically required when you’re buying a property .The seller needs some kind of guarantee that you’ll be able to afford the property. The simplest way to do that is to provide bond approval documentation, or hand over a hefty deposit if you plan on paying in cash. Even cash buyers often choose to use bond approval as their guarantee, however. This costs nothing, allows them to avoid paying upfront, and doesn’t prevent them from still paying cash down the line if they choose.
A suspensive condition is something that has to occur before a signed offer to purchase is considered final. If a suspensive condition is not met, the offer to purchase falls through, so it has to be clearly stated and agreed upon by both the buyer and seller. Typical suspensive conditions requested by buyers include successful bond approval, the sale of an existing home, or a positive home inspection or structural report. Sellers can also request suspensive conditions, such as a 72-hour clause allowing them to accept equal or higher cash offers.
Signing surety means taking responsibility for repaying a home loan if a bond-holder defaults for any reason. It’s quite common for parents to sign surety for a purchase made by their child. What many people don’t realise, however, is that unless you specifically limit your surety to a certain percentage, you’ll be responsible for the full outstanding amount of the bond.
RTI stands for “Repayment to Income” and refers to the percentage of your gross income that will go towards your bond repayments. The legislated maximum RTI is 30%, which means the highest bond repayment that anyone can qualify for is 30% of their monthly income, before expenses.
LTV stands for “Loan to Value” and simply means the percentage of the value of the property that is financed by the bank. Normally, this is around 80 to 90%, but can be as much as 104% with a Cost.
AIP means “Answer in Principle” and is usually the bank’s way of saying that they are satisfied that you can afford a particular property – they just need to make sure the property itself is worth what you’re paying. Final approval will be received after an official bank valuation has been completed.
“Remember,” says Hendricks, “if you don’t understand something at any stage, just ask your bond originator, estate agent, or even attorney to explain. There’s no reason your documentation should be a source of stress or confusion.”