The impact of lowering interest rates

I have noticed a drop in "new" homes coming on the market, or in our technical terms new listings, over the last month or two.

My conclusion from this observation is that because the interest rates have dropped significantly it means that people are getting back to a point where they can start covering their bond repayments again and are thus not being forced to sell their homes. Some analysts argue that it could be the influence of the change in seasons, but I don't believe that the winter could have such a profound change in a market so deep in recession. There is still a huge oversupply of homes for sale on the market and thus many bargains still remain unsold, but I believe that the supply will now start shrinking slowly as the bargains start disappearing off the market.

As for the demand for houses, I do think that the demand is slowly starting to rise as a result of the drop in interest rates which makes the bond repayments more affordable plus the fact that the house prices have dropped by between 10% and 20% over the last couple of months. There is still the serious problem of not qualifying for bonds or not having enough cash for the deposit which keeps the demand very low. However, I have met with quite a few clients over the last couple of months who have decided to first get their financial matters sorted out before venturing into the property market. Most of these people sorting out their financial will be ready to start buying by around October 2009, which will hopefully indicate the turning point in the market. We can only determine a turning point in a market months after it occurs and we have collected the statistics and done the analysis.

So in conclusion, if you are looking to buy a bargain property it is now time to focus and to start making a short list of the properties you like and to start applying for your mortgage bond. Or if you are thinking of selling your home - please postpone this until 2010 if at all possible, because by then the supply of homes will have shrunk and the demand would hopefully have caught up to the supply again.

Thank Goodness for another cut in interest rates this week!

Free will?

Over the last couple of month I have seen a number of TV ads offering a variety of "free" financial and legal services. Included in some of these is a Free Will.

I have learnt over the years that you rarely get anything for free especially from the financial sector. A free will can sometimes be a very expensive purchase! As far as I understand the financial institution writes up your last will and testament for you for free but you are then forced to make them executors of your will and this allows them to claim their fees against your estate. These fees are a usually 3.99% of the GROSS assets in your estate, now this amount does not sound too much but the problem is that it is calculated on the gross assets and not nett assets.

You thus end up in a situation where you buy a house for R1,000,000 and then die within the first year of buying the house, which means you owe R1,000,000 and thus the nett value of this asset is R0 but your executor still has a claim of R39,000 from your estate for executors fees. Far from free in my book! You should then also receive the life insurance payout of R1,000,000 to pay off your bond - does the executor claim another R39,000 from this amount as well? Probably.

Please ask about any "free" service offered to you by a financial institution and read the fine print carefully. It is your right to ask questions if you don't understand and please don't sign until you understand what you are committing yourself or your estate to.

You can appoint anyone to act as executor of your estate and it is a good idea to find the most competent person you know to do this, please also consider your attorney or accountant when making this decision. People typically do not negotiate executors’ fees upfront, but rather leave surviving family members to deal with this issue after death – if at all. Most executors will only consider a reduced fee if requested by the beneficiaries, who are at that stage going through a difficult time. It is better to negotiate this upfront and the negotiated fee should then written into the Will which binds the executor.

The real cost of buying a house

Buying a house is probably the most important investment you will ever make. Apart from the purchase price of the house, there are several other linked, once-off costs which, if you have not budgeted for them, can come as a nasty surprise, it is always wise to work it into your overall financial plan before taking the plunge. This way you’ll also know first-hand what it is that you can afford, keeping in mind that the banks no longer grant 100% mortgages, so buyers need to have a deposit of up to 20% of the purchase price and the buyer also has to pay the costs of registration.

Below please find an example of the costs involved in buying a house for R1 million and the a house for R500,000 - please note that these are only approximate costs.

Example 1: Purchase Price of R 1,000,000
20% Deposit R 200,000

Transfer Costs
1. Transfer Duty to SARS R 25,000
2. Conveyancer Fees R 10,000
3. Postages & Petties R 425
4. Deeds Office Transfer Levy R 500
5. Electronic Document Generation Fee R 111
6. Deeds Office Search Fee R 91
7. Local Council Rate Clearance R 150
8. FICA R 400
9. VAT R 1,500
= Total Transfer Costs (approx) R 238,177

Bank & Bond Cost on a R 800,000 bond
1. Deeds Office Levy Fee R 500
2. FICA R 300
3. Attorney Bond Registration Cost R 5,800
4. Postages & Petties R 325
5. Electronic Generation Fee R 111
6. VAT R 900
= Bond Registration Costs (approx) R7,936

Total costs (approx) R 246,113

Example 2: Purchase Price of R 500,000
10% Deposit R 50,000

Transfer Costs
1. Transfer Duty to SARS R 0
2. Conveyancer Fees R 6,000
3. Postages & Petties R 425
4. Deeds Office Transfer Levy R 400
5. Electronic Document Generation Fee R 111
6. Deeds Office Search Fee R 91
7. Local Council Rate Clearance R 150
8. FICA R 400
9. VAT R 900
= Total Transfer Costs (approx) R 8,477

Bank & Bond Cost on a R 400,000 bond
1. Deeds Office Levy Fee R 340
2. FICA R 300
3. Attorney Bond Registration Cost R 3,400
4. Postages & Petties R 325
5. Electronic Generation Fee R 111
6. VAT R 580
= Bond Registration Costs (approx) R1,656

Total costs (approx) R 60,133

Other Costs
Next you need to budget for the physical move, on average the cost of moving your furniture within a 100km radius will amount to around R10,000. Another small cost to bear in mind is an electricity connection/registration fee.

Monthly expenses that need to be budgeted for include:
1. Monthly repayments on the bond: At the current interest rate of 12%, the monthly repayment on a bond of R800,000 will be around R8,800 pm or on a bond of R400,000 will be around R5,000 pm.
2. Bond Monthly Admin Service Fee: R30.
3. Home-owner’s insurance: Banks normally add this to the mortgage amount to protect themselves against claims for flood, fire and hail damage.
4. Insurance on the owner’s life: This is to cover the cost of the house in case of death. The policy will not only cover the outstanding loan amount to the bank, but will also ensure that at the time of death the home-owner’s dependants have a roof over their heads. Life cover insurance may vary from service provider to service provider.
5. Rates and taxes: Due to the municipality for rubbish removal and the maintenance of your area.
6. Electricity and water: Due to the municipality for your monthly consumption of electricity and water.
7. Monthly Levy: In the case of a sectional title, fractional title, share block or life rights scheme.