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Monthly Archives: August 2014

HOW YOU CAN AVOID PAYING 30 % MORE FOR YOUR HOME

 

Save R320 000 on a R1 million property

 

You may be well aware of the strict lending criteria applied by the banks since the introduction of the National Credit Act and the potentially intimidating process that you have to go through for home loan approval. As such, you may be only too pleased when the bank finally grants you a home loan – and in fact so thankful for  the ”approval” from the bank that you do not challenge the interest rate “proposed” by the bank.

For example: If your interest rate is 2% above the prime lending rate, then your R1 million rand home loan can cost you a whopping 32% (R320 000.00) extra at the end of your home loan repayment period. This is surely indication enough to make you rethink the approach you take before you ask the bank for a home loan, advises Meyer de Waal, conveyancing attorney.

The factors that will have a major impact on your home loan approval will be your current credit rating and profile, as well as your exposure to debt and affordability.

If you first take the necessary steps to investigate your own credit profile and affordability before you approach the bank for a home loan, you may be in a better position to rectify mistakes on your credit profile, identify expensive debt (and make plans to first settle such debt), make sure that you have no late or non-payments reflected on your credit score-card and remove paid-up judgements against your name, as all these factors contribute to downgrading your credit profile. The lower your credit score, the higher your risk to the bank and thus the higher your bond interest rate, says Meyer.

An example of interest applicable on  a bond of R1 million rand, paid off over 20 years:

9.25 % interest rate

R1 198 080

 

10.25 % interest rate

R1 355 944

R 157 864 more = 15 % more

11.25 % interest rate

R 1 518 214

R 320 134 more = 32 % more

 

Buying your own property is most likely the biggest investment you will ever make. Similarly, if you utilise a loan from a bank to finance the transaction, it will most likely be the biggest debt of your life. This debt could stay with you for a period of between 20 to 30 years, as this is usually how long the repayment period is that is granted by the bank..

If you stretch your bond repayment over a 30 year repayment, with the same prime interest rate, you will end up paying  almost more than double the initial capital of the R1 million  borrowed.

20 years x 9.25 % interest rate

R1 198 080

 

30 years x 9.25 % interest rate

R1 961 631

R 763 551 more

 

It is thus blatantly clear that it is prudent to repay your loan in as short a period as possible. The question is – why wait the full 20 years to pay back your bond?

Before we start to look at a shorter period to repay your home loan, let us look at what you need to qualify for a home loan. Remember that the amount of the home loan that you need to borrow is the first bit of information that you require, as this will determine whether you will be granted a 100% loan to pay for the property that wish to buy, or only 80% . If you only qualify for an 80% home loan, then you will need, with your own money, to contribute the balance of  20%  to make up the full purchase price. The average deposit required by the banks at the moment appears to be 15% of the purchase price.

There are three basic requirements a bank will consider when granting a home loan. The first requirement is your “affordability”. Prior to the implementation of the National Credit Act (NCA) in 2007, the lending institutions applied the “30% of income rule”. It meant that if you wanted to raise a home loan of R500 000, you had to earn at least 3 times the amount needed to be paid back every month. When the NCA was introduced, the lending criteria was supposed to be calculated only on the borrower’s actual affordability, that is income less expenses, but we see that notwithstanding the directive of the NCA, the “30% of income” rule is still applied to determine the affordability of a borrower.

The second criteria of banks, which a home buyer often overlooks or neglects when submitting a home loan application, is the “credit profile” of a borrower, which is a very important factor.. The credit profile of a client will determine the risk that a bank is willing to take to lend out money to a client. For obvious reasons, the lower your risk to a bank, the lower your interest rate may be. The reverse is also true – the higher your risk, the higher your interest rate will be. If the bank is of the opinion that your debt exposure, your payment history of past accounts or late or non-payment of accounts will be a risk to them lending you money, they may decide to add between 2 to 4% interest points to the base home loan rate ( currently 9.25%). You may think that your first priority is just to get a home loan, regardless of the  interest rate being one or two percent above prime, but if you consider that you may end up paying this higher interest rate over 20 years, you will end up losing thousands of rands due to  an inflated interest rate.

The best advice is to get a copy of your credit profile before you apply for a home loan and investigate all the entries listed thereon. Check  how many enquiries have been made against your name over the past 2 years, as excessive enquiries for debt leads to the assumption that you may be shopping around for funding, which indicates that you may be relying on debt to fund your lifestyle – which again reduces your credit score.

An example of this scenario, was a teacher who applied for a home loan to buy five different properties in one year. Once a home loan was declined, she started looking for another property a few months later. Each application was unsuccessful. With each application the mortgage originator submitted her home loan application to all four banks and each time each bank declined her home loan application.  No-one ever assisted her in investigating why the loan was declined and as such, she re-applied a few months later to buy a property from another seller. After one year, she had 5 x 4 credit application enquiries on her credit profile. The 6th time that she applied for her home loan it was approved, as it came to light that the previous 5 applications were declined due to the fact that during such applications she was not permanently employed with the Department of Education. Once she had her permanent employment confirmed, the loan was granted. The problem however was that due to all the past credit enquiries against her name, the bank regarded her as a high risk and added 4 interest points to the prime lending rate. The result was that the higher interest rate made the repayment of the home loan too high and she herself had to decline the home loan.

A stronger credit profile may assist you in negotiating a lower interest rate. It is thus worth your efforts in making sure that your credit profile is strong and healthy before you apply for a home loan. This will enable you to use the extra money that you would have paid as an interest repayment, to rather pay into your bond each month as an extra payment, enabling you to pay off your bond much faster.

If you have a deposit available when you buy your own home, this deposit will lower the amount which the bank must lend to you and again this reduces the risk to the bank. The lower the risk to the bank, the lower your interest rate ought to be. It thus makes good sense to save towards a deposit before you go out to buy your property, as it improves your negotiation power and can reduce not only your risk to the bank but also  your subsequent interest rate.

Home owners will soon see the advantage to negotiating the best possible interest rate and if your affordability (meaning your cash flow) allows it, start paying off your bond faster by either paying in an extra amount  every month, or deposit occasional once-off payments into your bond. Every bit helps, advises Meyer.

INCREASE YOUR PAYMENT PER MONTH AND SAVE

When you buy a car on credit, the repayments are usually structured over a 60 month (5 year) repayment period. A car buyer will thus easily repay the credit of a R300 000 car bought over 5 years, but it will take 20 years to pay off a home loan of R500 000.00. Why not apply a similar reduced repayment structure for a home loan?

Paying extra money into your bond every month reduces the bond term and similarly, if you shorten your bond term, you again save thousands of rands over the term.

Home loan R1 million x 20 years x 9.25 %

 

Monthly payment

R9 158   pm

Interest paid over 20 years

R1 198 000

 

add R500 per month more

R9 658   pm

Interest paid over 17.5 years

R 1 012 368

R185 711 saved &  2 years 7 months

Add R 1 000 per month more

R10 158 pm

Interest paid over 15.6 years

R 881 382

R316 697 saved & 4 years 6 months

 

 

 

 

ONCE-OFF EXTRA PAYMENT

Rather than going on a spending spree with a bonus or unexpected windfall, consider paying that money into your bond to save thousands says Meyer.

Home loan R1 million x 20 years x 9.25 %

No lump sum payment

Monthly payment

R9 158   pm

Interest paid over 20 years

R1 198 000

 

One extra lump sum payment

       
 

R10 000

Interest paid over 18.11 years

R 1 097 597

R100 482 saved &  1 year & 1 month

 

Few investment opportunities will do better than the R10 000 paid into your bond account to enable you to save R100 482, says Meyer and the best is – you invest in the security of your own property.

Summary – Prepare and empower yourself before you approach the bank/s and you will save thousands of rands on your home loan.

-End- August 2014

Meyer de Waal

Oosthuizen and Co Meyer de Waal

My Budget Fitness

021 461 0065

meyer@oostco.co.za

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Posted by on 27/08/2014 in Content

 

Some thoughts on investing offshore

Seema Dala, Allan Gray (Head of Orbis Global Client Servicing in South Africa. Orbis is Allan Gray’s partner) is one of the long standing clients of our office and I recently read an article compiled by her.

 If you want to know more about investing offshore – read more ………………

 

  • Is the value of the rand important in your decision to invest offshore?

 

 

South African investors tend to race offshore when the rand weakens and offshore assets are doing well.  Your views on the relative value of the rand should however be just one of the factors in your decision to invest offshore.  Investors should also consider the diversification benefits of investing in global markets – the South African market represents just 1% of total world stock market capitalisation.  Increasing exposure to global markets, and to sectors that are underrepresented in the ALSI, serves to reduce portfolio risk over the long term.

 

The rand has continued to depreciate over the last 12 months, weakening by about 7% from R9.9/US$ to R10.6/US$. The extent of the rand weakness over the last few years (the rand was at R6.8/US$ three years ago) has not surprised us given the pressures on the currency, which include South Africa’s trade deficit and the resulting current account deficit, as well as our budget deficit.

 

In addition, the rand is susceptible to changes in foreign investor sentiment. We saw this play out in 2013 as our bond market sold off along with other emerging markets, largely due to concerns regarding the US Federal Reserve (the Fed) winding down its programme of quantitative easing. This, probably in combination with the poor SA economic fundamentals, caused the rand to weaken substantially.

 

 While it is difficult to say with certainty whether the currency will weaken or strengthen from these levels, particularly over the short term, we do think that there is a greater chance of further weakness as South Africa’s economic challenges make it vulnerable to a return to normal interest rates in the US, which may disrupt inward capital flows.

 

  • Developed markets versus emerging markets: where are we finding value?

 

 

It is important to remember that bottom-up stock pickers like Allan Gray and Orbis invest clients’ money in shares of companies they think are undervalued irrespective of developments in an economy.

 

While developed market valuations are currently looking stretched, there are some sectors where, in Orbis’ view, the stock market is overly pessimistic about short-term developments. The media sector, for example, is a cyclical industry where the future is likely to resemble the past and the markets’ concerns may be resolved in the fullness of time.

 

In emerging markets, Orbis has been finding attractive opportunities in countries like Korea, Brazil, Russia and China, which have broadly underperformed their developed market peers and, based on our bottom-up research, a select number of companies appear to be trading at a discount to their intrinsic value. We recognise that opportunities in less-developed jurisdictions often come with a higher probability of negative surprises, and accordingly Orbis requires a greater margin of safety when investing. But in Orbis and Allan Gray’s view, the risk of losing money comes not from economic uncertainty or nervy sentiment, but from overpaying for investments – in that regard, the less you pay, the lower the risk.

  •  Opportunities in AfricaFor an equity investor, the importance of short-term news and economic cycles is that these events create opportunities to buy companies for less than they are worth, as investors with short time horizons exit. The seemingly simple trick of long-term wealth creation is to invest consistently in assets that are trading at a discount to what they are worth and to avoid those trading at a premium. We think a number of these opportunities exist in Africa.

 

For example, Zimbabwe’s obvious risks give us the opportunity to invest in high-quality businesses at valuations that are unheard of in the rest of the world, with the possible exception of Russia. We believe that a total economic collapse is unlikely in Zimbabwe – however, should such an extreme scenario occur, we own quality industrial businesses with little debt that should retain some value.  If, rather than collapsing, the economy defies its critics and begins to recover or even remains stable, which is the more likely path from rock bottom, our investments should perform nicely.

The situation in Nigeria is very different as corporates are investing capital there to meet the expected demand from the growing consumer base.  Unfortunately, this can reduce returns for all players in a sector. A good example is the beer industry and Guinness Nigeria in particular. The highly rated Guinness has seen its return on capital fall from 40% in 2010 to 22% currently – still a very high number, but nonetheless a disappointment for investors. This is not to say we are not finding opportunities in Nigeria; we are. However, the risk of buying a company where earnings are unsustainably high because of temporarily weak competition is a much harder risk to identify than the plainly obvious risks in Zimbabwe.

  • How to invest offshore

 

 

There are three ways to access offshore investments:

  • Use rands to invest in rand-denominated unit trusts
  • Use foreign currency to invest in foreign currency unit trusts via an offshore investment platform
  • Go directly to the foreign manager

 

The first choice to make when investing offshore is whether you want to use a fund manager’s offshore allowance, or your own. Your choice depends mainly on whether you want to invest in rands or foreign currency and how much you wish to invest. 

 

If you value simplicity, and don’t particularly want to expatriate your assets, there are various rand-denominated offshore unit trusts available locally. The advantages of this route include relatively few administrative requirements and the fact that you don’t need to buy foreign currency or get tax clearance from SARS. However, these funds may close from time to time due to foreign capacity constraints.

 

If you want to expatriate your assets, or you prefer not to be restricted to the funds on offer in South Africa, the simplest route to invest in foreign currency offshore unit trusts is through an offshore platform operated locally.

 

Of course, you can also choose to go directly to individual offshore investment management companies, but the extensive range of choices can be confusing.

 

Using a locally operated offshore platform gives you options, and makes the selection more manageable. It also affords you a single point of contact, instead of having to deal with separate companies if you want to invest in funds from more than one asset manager. You are also able to switch between funds easily if your needs change.  It is worthwhile talking to your financial adviser about which unit trusts are the most suitable for you.

 

  • How can you differentiate between offshore managers?

 

  •  

It is challenging to differentiate between investment managers. It pays off to gather as much information as possible upfront and to ensure that the evidence is relevant to future outcomes, not past returns. By looking at the business structure, the team stability, experience, breadth and evidence of past investment conviction and temperament, you can make a call on whether or not you think the manager will deliver consistently. These types of questions avoid the natural inclination of anchoring on past performance when it is the future that matters.

 

Of course most investors and advisers do not have the time, appetite or access to information to thoroughly research all funds or fund managers. Allan Gray has thus engaged independent ratings agency Fundhouse to rate the funds on its local and offshore platforms. Fundhouse is an independent, owner-managed financial services group, with a global research team and an extensive evidence-gathering process. They apply a bespoke, qualitative approach to fund ratings. The team analyses each fund manager, looking at the business and shareholders, the investment edge and process, the experience of the team, their decision-making skills and past investment actions. They gather detailed evidence by engaging in face-to-face interviews with investment teams and conducting due diligences. Analysts collate as much information as possible to ensure that the evidence is relevant to future outcomes and not based on past returns. At the end of this process a rating is assigned to each fund.

 

Fund ratings add an extra layer of assurance in the decision-making process and go some way to assisting investors and their advisers to make the right long-term choices.

 

You can contact Seema at seema.dala@allangray.co.za

 
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Posted by on 21/08/2014 in Content