Property Market Trends - Mortgage Bonds

There are signs of life returning to the property market, or green shoots (the new media buzz word). With the falling interest rates and the easier entry into the market (lowering of deposit requirements) there has been renewed interest and we are starting to see an increase in sales.

The banks had taken the opportunity of a quiet market to renegotiate their contracts with the bond originators and it seems there has been a power shift from originators (squeezing the bank's rates to as low as 4% under prime) to the banks dictating rates of up to 4% above prime.

Since 2005 the banks have steadily lost business to the originators, as the chart below shows the banks hardly granted any bonds (directly to customers) by end of 2008. This gave the originators the upper hand and they also squeezed the banks for commissions of up to 2.5%, which resulted in the banks paying the originators billions per year! These billions ultimately came from customers in fees and charges.

The banks have now renegotiated the originator's commission down to around 1.5% and are aggressively encouraging clients to approach them directly for bond finance at a rate lower than the originators can negotiate.

I hope that once the banks start feeling the benefits of the increase in revenues from interest rates above prime and lower commissions to originators they will give some back to their clients in the form of lower bank fees and also in lower bond rates!

Remember all these costs were shifted on to us as consumers in the form of admin fees and bank charges!

Source: Financial Mail

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.

Mortgage Originators - My Opinion

In an industry where there are so many accusations, dishonesty, lies and bad press, I decided that I would never get dragged down into the dark depths of unethical practices.

I had worked in the financial sector for most of my life and during this time I was involved in the IT sector for at least ten years. One of the biggest No No's of this industry is Kickbacks. It happens every once in a while that an IT infrastructure decision is based on the overseas trip "earned" by the IT specialist from the supplier. I personally was propositioned directly once in my IT career and was truly shocked that these people even mentioned something like this.

So when I announced to my then colleagues that I had decided to leave the "safe" world of corporate life to go into Real Estate into a very small agency, one of them asked his mom (a mortgage originator) to call me. Well, I was freaked out and insulted by her call because she congratulated me on my decision and then went ahead to promise me a Kickback on every buyer I sent her way. I then decided that I would never ask my clients to use a mortgage originator and would only offer it to them if they seemed to be at a loss. This was one of the worst decisions I have made to date!

What I have learnt since that very naive day is that the mortgage originator plays a crucial role in this process. The mortgage originator is a specialist who consults with and helps the buyer to get their financing. Remember the estate agent is usually committed to the seller and not the buyer as the seller pays my commission.

In my opinion if the buyer reveals his financial position to me I feel that the relationship between us then becomes much more intimate and my loyalties start being split. I prefer to refer buyers to an originator whom I trust fully and then I liaise between them to see that the process is moving towards a conclusion.

By not doing this I have no real idea of where the process is and if there are any stumbling blocks which are not being communicated properly between the buyer and the bank. What often happens is that the relationship between the agent and the buyer can become strained because the buyer does not like the agent asking personal questions and the banks are not allowed to discuss their clients with the agent.

As a forward thinking agent I know that the buyer is crucial to my business because I want to become their preferred agent in the future.

As for the banks I do believe that they feel the same, if this was not so mortgage originators would have been sidelined and would have disappeared in the last couple of months with the current financial crises. We know that the mortgage divisions in the banks are really struggling to meet their targets and they would prefer to save the commission they pay the originators but they must realise that these originators do have a very important role in this process.

So next time you hear or see an advert telling you that your agent does not deserve to get the kickback from the mortgage originator, ask yourself how well you understand the process and pitfalls of going to all the major bank to negotiate the best possible mortgage while running your life, job and family as usual.

Caroline