Home Finance Guide
Take the guessing work out of finance and property with our regularly updated frequently asked questions for sellers, buyers, landlords and tenants.
1. WHAT IS CAPITAL GAINS TAX ON PROPERTIES?
In South Africa, the Capital Gains Tax (CGT) is a tax imposed on the profit or gain made from the sale or disposal of an asset, including properties. CGT applies to individuals, trusts, and companies, and it is regulated by the South African Revenue Service (SARS).
Here are some key points to understand about the capital gains tax on properties in South Africa:
- Calculation of Capital Gains: The capital gain is determined by deducting the base cost of the property from the selling price. The base cost includes the acquisition cost, improvement costs, and other allowable expenses.
- Inclusion Rate: The inclusion rate determines the percentage of the capital gain that is subject to tax. In South Africa, the inclusion rate for individuals is generally 40%, while for trusts and companies, it is 80%.
- The tax rate: The more you earn, the higher your marginal tax rate. As of February 2022, the marginal tax rate can range from 18% to 45% depending on your incomeSome things are excluded, for example:
- Capital gains on a primary residence (the residence in which the home seller lives) are excluded up to a rate of R2 000 000.
- If you and your spouse own a joint bond, the exclusion of R2 000 000 is split between the two of you, so you each qualify for an exclusion of R1 000 000.
- Capital gains tax on a second property in South Africa qualifies for an exclusion rate of R40 000.
– If the property is NOT sold as a going concern, then the seller’s VAT status will determine whether VAT or transfer duty will be applicable in the transaction.
2. What are the requirements for a property to be sold as a going concern (0% VAT payable)?
- Both the seller and the purchaser as described in the Offer must be registered for VAT;
- There must be a VATable business being conducted at the property which is being sold as part of the property (like a lease); and
- the VATable business must also be sold from seller to purchaser.
3. What does appreciation mean in real estate?
– Appreciation is how much your property’s value increases over time
There are many reasons why appreciation happens – it may result from inflation, increased job opportunities in your local property market, and overall property development in your town. You can raise the appreciation value with home improvements.
It can also be a valuable tool for a homeowner or investor to increase their property value by making a few home improvements. Not all home improvements will add value to your property but studies have shown that improvements to kitchens and bathrooms are a smart choice.
This is the opposite of depreciation, which is a decrease over time
4. What is bridging finance?
–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..
5. What does consolidation of debt mean?
–Consolidation of debt is a service generally only available to existing bondholders 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.
6. What does bond approval mean?
– Once your chosen Bank has received all the relevant documents, the approval process begins.
Bond approval is always subject to a property valuation.
The Bank will approve the loan subject to a property valuation, and subject to meeting all the credit and FICA requirements
7. What is a repo rate?
– The repo rate is set by the Reserve Bank’s Monetary Policy Committee and is the rate at which it lends money to the country’s commercial banks.
How does this impact you?
When the repo rate goes up the commercial banks and other lenders put up their interest rates. This means that the cost of borrowing money increases – if you don’t have a fixed interest rate, your monthly installments on your loans will also increase.
8. What is a forced sale of property?
A forced sale is the sale of a property that was used as security of a loan to repay the creditor when the borrower can no longer pay back the loan.
9. What is a guarantee and how long should it take to issue?
A guarantee is a formal document issued by a registered financial institution that guarantees payment of a specified amount upon registration of transfer.
Your usual transfer normally requires the following guarantees:
- A guarantee to settle the amount owed by the seller to his / her bank;
- A guarantee to settle the seller’s bond cancellation fees owed to the bond cancellation attorney;
- A guarantee to settle the balance of the purchase price.
Guarantees are usually issued by the bank from which the purchaser obtained a mortgage loan to enable him/her to purchase the property; or by a bank holding cash funds on behalf of the purchaser.
It is advisable to ensure that there is ample time for the guarantees to be issued when drafting an Offer to Purchase. The recommended time is usually 30 days after the granting of a Bond or 30 days from the date of signature of a cash deal.
10. What are bank proceeds?
It is a common misconception that once a bond is granted, no further checks are done by the Bank who granted the bond. In reality, once the bond attorneys have drafted the bond documentation and signed the documents with the clients, the documents are uploaded electronically to the respective Bank for inspection and a “Proceed to Lodge”.
During this inspection phase the documents are checked for full signatures, accuracy, and compliance with any special conditions of the bond grant. This inspection phase takes, on average, 5 – 10 working days and is usually the last step before the transfer can be lodged in the Deeds Office.
Each Bank has different requirements which must be met before the proceed to lodge will be granted. Sellers & Purchasers can greatly decrease the time required to obtain these proceeds by providing all necessary documents as soon as requested by the respective attorneys. It is particularly important for the Seller not to delay in providing the Electrical Certificate of Compliance and, if required by the Bank, Purchasers to not delay in obtaining Life Insurance.
11. What is the difference between rates and taxes, and levies?
-Rates and taxes can be explained as a charge raised by the local municipality for the services provided in relation to the property such as refuse collection.
The amount charged is a percentage of the market value of the property. It is mandatory that, prior to registration of transfer, a rates clearance certificate is obtained from the local municipality. The municipality issues figures that include all amounts owing in respect of rates and taxes for the two-year period preceding the date of application and the estimated amount for municipal services in advance.
Levies, on the other hand, are payable by sectional title unit homeowners or homeowners that typically reside within an estate.
The managing agents for the scheme or estate will recover levies from each individual homeowner and utilise them towards maintenance costs, management, and upkeep. To obtain a levy clearance certificate, a conveyancer will request clearance figures from the managing agents for the scheme or estate.
These figures will include any outstanding levies, interest on overdue accounts, special levies, scheme contributions, and administration fees that might be applicable. The figures may also include an estimated advance for a period stipulated by the managing agents.
12. When should I use home equity?
Is there ever a good time to use your home equity?
Homeowners who have equity available in the bond accounts might be tempted to withdraw some of the money and use it for more immediate needs or wants. While it is not always a wise decision to take equity out of the bond, there are a few circumstances where it can actually benefit the homeowner.
If a homeowner does decide to use their home equity, it should be utilised in a way that will put the homeowner in a better financial position than they were in previously.
There are a few common situations in which homeowners choose to use their home equity. While some reasons for using the equity make good financial sense, others don’t – the decision will largely be based on the homeowner’s circumstances and future plans.
When to use home equity?
Should I use it to renovate my home?
Yes – One of the most common reasons that homeowners withdraw equity is to renovate and improve their property. There are a number of benefits to using home equity for renovation. Apart from the fact that it will add to the home’s marketability when it comes time to sell, it gives the homeowner the opportunity to change aspects about the home that they may not have liked when they initially moved in.
The homeowner can update areas of the home such as the kitchen and bathrooms to give the home a more contemporary look and feel or they could build on a much-needed extra bedroom. This will add to the occupants living experience in the home and improve the home’s value.
When deciding to renovate it is important not to overcapitalise and to ensure that the planned project will, in fact, add to the perceived value of the home.
Renovation is a very attractive option if the property has appreciated in value a lot and the homeowner has substantial equity built up.
Should I use it for investment purposes?
It depends – With investment there is always an element of risk so using home equity to fund an investment depends on whether the homeowner has done their research and is confident that the degree of risk is worth the potential return.
Part of the research a homeowner should do is whether the return on the investment is going to be greater than the interest charged on the borrowed money.
Another popular use for home equity is for the homeowner to start their own business or further their education. In scenarios such as these it would be advisable to consult with an objective financial advisor who can provide guidance and advice regarding these options.
Should I use it to pay for my children’s education?
Possibly – Interest rates on student loans start at prime and go upwards depending on the credit profile and level of affordability. In some cases, the interest charged on the home equity would be lower and the loan amount could be higher. While using home equity to finance your children’s education is a tempting option, it does have its risks.
The feasibility of this option largely depends on the parent’s age and financial well-being. Taking equity out of the bond could delay the homeowner’s retirement, or worse put them in a financial position where they could risk losing their property. In these instances, it is best not to take the money from the home equity. According to studies, children are generally better off with financially secure parents than being financially secure themselves and having to look after their parents.
Should I use it as an emergency fund?
Perhaps – If the homeowner is in dire need, home equity can be used in an emergency, however, it is important to remember that at some stage it will need to be paid back. Home equity should only be used as an emergency fund if the homeowner has no other available options. Ideally, homeowners should put aside money each month to build up a contingency fund, so they do not find themselves in a situation where they have to use their equity for an emergency.
Should I use it to consilidate debt?
No – Many homeowners opt to use their home equity to pay off credit cards, car loans, and other forms of personal debt. This option will provide the homeowner with additional disposable cash initially, but if they obtain new debt they will be far worse off in the future. Interest rates on credit card debt and personal loans are generally higher than bond interest rates, so it will make financial sense from that perspective. However, if the homeowner does do this, they will have to ensure that they don’t continue to use credit cards and take out further debt.
Homeowners who are thinking of using their home equity should consult with a financial adviser if they have any doubts or would like an objective opinion. Regardless of the reason, a homeowner uses their equity for, the most important aspect is that the decision should be beneficial and does not hinder them financially in the future.
13. What is a credit score??
A credit score, also called a credit rating, is a three-digit number used by lenders to determine whether you qualify for credit, such as a loan or credit card.
The information in your credit report is used by most credit and service providers as an important contribution to the development of their own credit risk score. This, along with your employment history; your income and affordability assessments as well as the type of credit for which you are applying, may affect the outcome of your credit application.
Your credit score is calculated using a formula that evaluates how well or badly you pay your bills, how much debt you carry and how all of that stacks up against other borrowers. In effect, it tells you in a single number what your credit report says about your management of existing credit.
Generally, the higher your score, the better.
A score of 600+ will give you a fair chance of home loan approval. although this may vary according to which bank you use. A score of 670+ is considered an excellent credit score, significantly boosting your chances of home loan approval. Scores below 600 would be considered high to very high risk. In this case you’ll want to look at ways to clear your credit record.
14. What is repossession?
– Repossession or foreclosure is what happens when a homeowner fails to pay the mortgage.
This legal process is when the owner forfeits all rights to the property. If the owner can’t pay off the outstanding debt, or sell the property via short sale, the property then goes to a foreclosure auction. If the property doesn’t sell there, the lending institution takes possession of it.
15. What is an asset?
– Real assets are physical assets that have an intrinsic worth due to their substance and properties. Real assets include precious metals, commodities, real estate, land, equipment, and natural resources.
Assets can be grouped into two major classes: tangible assets and intangible assets. Tangible assets contain various subclasses, including current assets and fixed assets. Current assets include inventory, accounts receivable, while fixed assets include buildings and equipment.
The physical health of tangible assets deteriorates over time. Depreciation is applied to tangible assets when those assets have an anticipated lifespan of more than one year. This process of depreciation is used instead of allocating the entire expense to one year.
16. What is a defaulting mortgager?
– A defaulting mortgager is when a person (mortgager) borrowed money from a financial institution (bank) to buy a property, and then breaches (default) the loan agreement (mortgage), which may lead to the sale of that property.
17. What is FICA?
– FICA stands for the Federal Insurance Contributions Act.
The aim of FICA is to establish and maintain an effective policy and compliance framework and operational capacity to oversee compliance and to provide high quality, timeous financial intelligence for use in the fight against white-collar crime, money laundering, and terror financing in South Africa.
FICA was established to ensure integrity and stability of its financial system, to develop economically, and ensure responsible and honest citizens.
What documents do you need from me for FICA purposes?
- Your green barcoded South African identity document or the new smart identity card.
- A document that reflects your residential address – the document must contain your name and physical address (PO Box numbers are not acceptable) or stand number and suburb. The following documents are acceptable as proof of residence:
- Utility bill, e.g. municipal water and lights account or property managing agent statement
- Bank statement on an official bank document or form
- Municipal councillor’s letter
- Tax certificate
- Recent active lease or rental agreement
- Municipal rates and taxes invoice not older than three months
- Account statement from a NCR (National Credit Regulator) registered service provider (NCR number must be visible/recorded on the document)
- Security service providers registered with PSIRA (Private Security Industry Regulatory Authority), e.g. Chubb, ADT (PSIRA number must be visible/recorded on the document)
- Telephone or cellular telephone statement
- Official SARS document (not eFiling documentation)
- Valid television license renewal letter
- Television license renewal/confirmation letter
- Subscription TV, e.g. MultiChoice statement
- Home loan statement from a financial institution
- Long/short term insurance policy documents a Financial Services Provider (FSB number must be visible/recorded on the document)
- Motor vehicle registration/license documents
- Body corporate/governing body letter or statement
- Official employer letter for employees residing on company/institution premises
- Official university/technikon/college or tertiary institution registration letter
- Affidavit to confirm address
- Medical aid statement or policy document (policy number must be visible on the document)
If you cannot provide your green barcoded ID or smart card due to the fact that it is lost, stolen, or not yet issued, acceptable alternatives are:
- Valid passport, which is also suitable for foreign nationals
- Valid driving license
- Valid birth certificate (for minors)
- A sworn affidavit or police statement and proof of reapplication for an ID from the Department of Home Affairs is required, as well as proof of your income.
I have submitted FICA documents before – why do I need to do this again?
If some of the FICA information and/or documentation that a business or financial institute have is illegible or incomplete you will have to resubmit your documents.
Keep in mind that FICA, its regulations, and its guidance notes are continuously under review, requirements change from time to time. Financial institutions like a bank are obligated to comply with this legislation, regulations and any changes thereof.
18. What is home equity?
Equity is the difference between the market value of your home and the amount you owe the lender who holds the mortgage. Your equity is the money you’d receive after paying off the mortgage if you were to sell the home.
How to build equity
You can build equity by:
• Paying your monthly bond payments – and a little more Every payment you make goes toward reducing what you owe and increasing your equity, by adding a little extra on a payment or two throughout the year you are growing it faster.
• Doing renovations Imagine using your bonus at the end of the year to do a bathroom remodel, this not only increases your home’s value it also increases your equity stake.
• Making a larger down payment. The more you put down, the smaller your loan balance will be—meaning more home equity. You can experiment with the effect by using our bond calculator.
You can lose equity by increasing your loan amount, reducing the value of the house through disrepair or damage, or being exposed to disfavorable market changes.
Building equity allows you to see more of a return on your investment when it’s time to sell your house.
20. What is a balloon payment?
A balloon payment is a large payment due at the end of a balloon loan, such as a mortgage, commercial loan, or other amortized loan.
A balloon loan typically features a relatively short term, and only a portion of the loan’s principal balance is amortized over the term. At the end of the term, the remaining balance is due as a final repayment. On installment loans without a balloon option, a series of fixed payments are made to pay down the loan’s balance. Balloon payments allow borrowers to reduce that fixed payment amount in exchange for making a larger payment at the end of the loan’s term.
In general, these loans are good for borrowers who have excellent credit and a substantial income.
21. What is a prime lending rate?
The prime lending rate is the interest rate that commercial banks will charge their clients when issuing a loan – such as a home loan.
The rates for mortgages, small business loans, and personal loans are based on prime.
Our bond calculator is updated with all the latest interest rates.
22. What is Debt-to-Income Ratio?
– A debt-to-income ratio is a measure that compares the amount of debt you have to your overall income.
When looking at your personal finances home loan originators and other financial institutes use this ratio to measure your ability to manage payments each month and to repay the money that you have borrowed.
A low debt-to-income ratio demonstrates a good balance between debt and income. In general, the lower the percentage, the better the chance you will be able to get the loan or line of credit you want.
If you have a high debt-to-income ratio it signals that you might have too much debt for the income you have, and lenders view this as a sign that you won’t be able to take on additional repayments.
How to calculate debt-to-income ratio
To calculate your debt-to-income ratio, add up your total recurring monthly obligations (such as bond repayments, student loans, car loans, child maintenance, and credit card payments), and divide by your gross monthly income (the amount you earn each month before taxes and other deductions are taken out).
23. What is amortization?
Amortization is the process by which loan principal decreases over the life of a loan, typically an amortizing loan. As each mortgage payment is made, part of the payment is applied as interest on the loan, and the remainder of the payment is applied towards reducing the principal.
An amortization schedule, a table detailing each periodic payment on a loan, shows the amounts of principal and interest and demonstrates how a loan’s principal amount decreases over time. An amortization schedule can be generated by an amortization calculator.
Negative amortization is an amortization schedule where the loan amount actually increases through not paying the full interest.
Should you therefore fix your rate or rather opt to reduce your balance?
Staying on a variable rate means that you will also benefit from any further cuts the Reserve Bank may make. And if you have an access-type bond, you will always be able to withdraw any additional amounts paid into your bond account should you need them in an emergency.
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Tholulwazi Capital is a registered credit provider NCRCP13761