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FINANCIAL LITERACY

The importance of financial literacy in buying and owning a home – flowing from the comments by Pravin Gordhan

Finance Minister Pravin Gordhan launched a strong attack on financial institutions, which he referred to as “greedy monsters” that put profits before the wellbeing of the people they are supposed to serve 

The problem
He referred mainly to the economic meltdown in 2008 but failed to mention the current crises being created by short term and unsecured lending. It appears that lenders are favouring “fast” money. These credit lines are characterised by high interest rates (reaching up to 60% per annum) for unsecured loans repayable over shorter periods which range from 3 months to 5 years. In comparison, a bond repayment period is usually extended over 20 years, with interest rates currently ranging between 9 and 12% per annum. Recent statistics reveal that the rand value of unsecured lending is on equal par to that of secured lending.

With some 2,2 million South Africans in need of a home, it is a concern that mortgage approvals rose by a mere 4% in the past two years. This stands in stark contrast to unsecured lending which rose by 54% over the same period. We are unsure how the National Credit Act and ‘risky’ lending policies are applied. My Budget Fitness has therefore introduced the HomeOwnerPropertyEducationSchool as a service to prospective buyers to improve their chances of obtaining home loan finance. Attendees are shown how to improve their credit rating and affordability.

They will learn how to increase cash flow by reducing monthly credit commitments through hands on education and training. We regularly encounter clients who have unsecured loans that are 4 to 5 times larger than their monthly salary. Prospective buyers who are over indebted with unsecured loans will quite often find their home loans declined. It appears that, since the introduction of the NCA, the general public is not necessarily receiving more protection against reckless lending, but rather just faster ways to obtain debt as lending institutions have developed advanced technology to expedite the approval of an unsecured loan.

One recent example is a client whose home loan was declined due to debt impairment and over-indebtedness. Joe (not his real name) borrowed R 9 000.00 from A Bank to pay back a loan taken out from C Bank 2 months ago. The loan from the first bank was a 4 month loan and cost him R2 400 per month. When Joe realised that he was struggling to pay the R2 400 per month, he then took up a new loan of R9 000 with another bank, with a repayment period of 8 months, which costs him R1 600 per month. His new monthly repayment is now less that the first loan, but in effect the new loan will cost him R12 800 in interest over and above the capital of R9 000.00 that has to be paid back by the end of the loan term. It will come as no surprise if he borrows a larger amount after 8 months to pay back the balance then due.

The rapid increase in unsecured lending increases the debt burden and has a negative effect on the credit profile of the people who are most desperate to own their own home, those that want to buy a house in the price range between R250 000 to R600 000.

In the current “affordable home loan” market, for every 1000 interested buyers, a property developer can expect to convert an average of only 40 into home owners. The search for mortgage finance by a prospective home owner may start with online research on how to obtain a home loan, as some websites offer home loans even to “blacklisted” customers. If you visit your bank or work through a mortgage originator you will find that banks are in an extensive campaign to out-do its competitors to provide more attractive banking packages. However with interest rates being the lowest in many years, in the affordable home loan market more that 65% of all home loan applications are still turned down. Property developers say that they have to sell the same house three times before the bank will approve the buyer for a home loan. The lack of affordability to service the required bond repayments and impaired credit behaviour appears to be the main reason why bonds are declined in the affordable market, such being household incomes that earn below R16 000.00 per month.

The solution
We conducted a study over the past 4 years to show why home loans are declined and decided to offer a service to prospective buyers by guiding them through the basic steps on how to buy a home. We realised we need to introduce education and budget behaviour which started the concept of ‘HomeOwnersPropertyEducationSchool’.

In the School we show the prospective buyer how to buy a home with reference to the   A B C, such being special focus on Affordability, Behaviour and Castle, the latter being the property and or deposit offered as security if required.

As the foundation, home ownership education to the prospective buyer is supported by Setsmol, a company specialising in home ownership education for clients of Standard Bank, ABSA, FNB, and Anglo Mines. The service and experience of Setsmol, who has been involved in home ownership education for more than 10 years, is invaluable as Setsmol has trainers throughout South Africa, and can perform the training in most of the official languages. E- Learning, which was recently introduced through the collaboration of another group, expands the service and enables the participant to work through a series of web-based training modules in support of the home ownership education.

We need to enable a client who participates in the education programme to change his credit spending behaviour. First we discuss the client’s goal – and then work out a plan to reach the goal. The goal of the client is usually linked to the purchase price of the property he wants to buy.

With the client’s collaboration we then analyse and capture his monthly budget and debt exposure through a Budget Calculator. A revised budget will be prepared for the client with the aim to meet his goal. Not every goal and time period will be the same as each client has different debt exposure, income and surplus funds that need to be worked with. The client usually participates for a period of 6 months or longer in the programme and receives mentorship and education on a regular and structured basis.

A tool to track expenses through a mobile phone was developed. We found that few clients actually have a budget and manage their salaries and expenses on a structured manner. We thus had to provide a tool to assist the clients to make the budgeting easy, which is why we developed the mobile2budget tool to capture each rand that you spend through your mobile phone. Since not every customer has a smart phone the challenge was to develop a tool that can relay a budget expense through a USSD or a WAP message to ensure that any type of phone can use it. With Mobile2budget you can first create your own budget, and then capture each rand that you spend by using your mobile phone. Messages are sent in an electronic format to a ‘back office’ electronic bookkeeping system that captures each expense in a particular category, such as food, entertainment and petrol and 25 other expense categories. You can view your expenses by logging into the website and soon adjust your expenses as you become more aware of your actual spending.

To enable you to stay within your budget, your personal trainer and mentor will engage with you on a regular basis to assist with planning and suggest changes to ensure that you stay within your budget. Only once you really know how much money you waste on unnecessary items can you start to adjust and trim your budget. In doing so you will start to reduce your debt and thus improve your credit rating and profile. We are amazed how our clients change their behaviour and regularly phone us to announce, “I have just received extra money and used this money to reduce debt that used to keep me awake at night – I am now closer to reach the dream of owning my home.” Prior to enrolling in the education programme, they would have spent that extra money over the weekend.

Rent2Buy
The concept to rent a property with the option to buy also forms part of other products developed over the past few years. With rent2buy, the prospective buyer will rent a property and pay rental that is equal to a bond repayment, plus rates and taxes. Additional rental payments, over and above the market related rental, can be credited to the purchaser to enable him to build up a savings account during the duration of the rental period. It is required that the rent2buy tenant participates in the budget fitness rehabilitation for the duration of the rental period. Not every client whose bond has been declined will be able to rent a property with an option to buy, as the client must first pass the rent2buy required affordability and credit behaviour test.

During the 6 month period in the School, the client receives the assistance of the budget fitness mentor, a bespoke personal budget, a budget calculator, home ownership education, E- Learning and the mobile2budget tool. These work together to support the quest to become a responsible borrower who will understand the responsibilities of managing a budget, servicing a mortgage, rates and taxes and understands the obligations of a home owner. One of our main objectives is that, once a property is purchased, the owner must not lose the property. After all, your home is your castle! One major bank has already engaged in a pilot project and many property developers are also participating. They realise the value of education, which is the key to responsible and sustainable lending.

Meyer de Waal
My Budget Fitness
021 461 0065 / 083 653 6975
meyer@budgetfitness.co.za

THE ABC
Gustav Zwiegelaar of SA Home Loans uses a simple analogy to illustrate the three basic requirements of a successful home loan application. These are incorporated into the school curriculum to illustrate the basic principles of a credit decision to prospective buyers so as to help them meet the credit requirements of lending institutions. We call it the A B C of a Home Loan application.

So what are they?

A – Affordability: A savvy home loan provider must look at all financial responsibilities and commitments and see whether there will be sufficient net income to meet these as well as repay a home loan and have a surplus for unforeseen circumstances. This is done by scrutinising banking account statements and salary slips as well as personal credit reports.

B – Behaviour: Home loan providers look at how potential clients honour other credit agreements, such as clothing accounts, vehicle purchase agreements, service agreements and so on. This is also obtained from an independent credit report. Specific behaviour is often reflected in banking account statements. This may be in the form of good credit balances on the one hand, or returned debit orders on the other.

C – Castle or house: (As per Gustav he is taking some literary licence here – we know your home is your castle) There has to be sufficient value in the property to at least meet the value of the loan, and preferably a little more. As such the availability of a deposit may improve your chances to obtain a home loan. However, some banks do offer 100 % loans, depending on your credit and risk portfolio. Gustav says, “If I had money for every time I have been told that there is so much value in an applicant’s property and we can just take it back if the repayments are not made, well, you can guess the rest. The truth is that we are not in the business of taking and selling homes. We don’t want to. It is important that all three factors are satisfied in order to extend a loan.”  That is simply a responsible approach.

 

 
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Posted by on 26/07/2012 in Content

 

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WHO IS REALLY ENTITLED TO THE BENEFITS UNDER A LIFE INSURANCE POLICY?

In the back of my mind I can still hear my Financial Advisor stating the importance of nominating a beneficiary for my life insurance policy.  Nominating a beneficiary on your policy assures you of where the sum assured (the amount for which insurance was taken out) will go after your passing, instead of just being pooled together at random with the other funds in your estate. 

The beneficiary of a life insurance policy becomes entitled to the benefit under the policy only upon the death of the policy holder and not prior to this event occurring.  This makes sense right, as the policy holder’s life is insured by the policy. 

However, uncertainty creeps in when events take a turn for the unexpected.  What happens should the beneficiary predecease the policy holder?  In this instance the policy holder will have to appoint a new beneficiary, after which matters will return to the status quo.  Unfortunately, many people pay attention to their policies only when they sign up and never revert back to them for the servicing thereof, a habit which is very important, as you will see below.  The purpose of this article is to reveal the consequences should a beneficiary predecease the policy holder, who in turn does not nominate a new beneficiary to replace him or her.  This issue recently landed in court, in the case of PPS Insurance Company v Mkhabela (159) of 2011, where even the judges had to consider it carefully.  The case can be summarized as follows:

Facts:

Ms Sebata was the owner of a life insurance policy issued by PPS Insurance.   She nominated her mother, Ms Mkhabela, as the beneficiary of the policy in the event of her death.  Ms Mkhabela passed away on 26 May 2007, predeceasing her daughter, the policy holder.  Not long thereafter, Ms Sebata also passed away on 12 August 2007.  There was thus no beneficiary nominated when the proceeds of the policy fell due on Ms Sebata’s death, as her mother had predeceased her.  The executor of Ms Mkhabela’s estate claimed the proceeds of the policy in the High Court.

Legal Question:

Did the right to the proceeds/benefit of the policy vest in Ms Mkhabela, and therefore in her estate, prior to the death of the policy holder?

Court of first instance:

The judge reasoned that Ms Sebata’s nomination of her mother as the beneficiary of the policy ceased to exist upon Ms. Mkhabela’s death and that the proceeds therefore vested in Ms Sebata’s estate.  The claim was dismissed with costs.

Full court:

The executor of Ms Mkhabela’s estate then appealed against the ruling of the court of first instance.

The full court held that as Ms Mkhabela had accepted her nomination as beneficiary, a binding agreement came into effect between herself and PPS Insurance.  This agreement was regarded as a stipulatio alteri – an agreement for the benefit of a third party – which created a spes for Ms Mkhabela, which spes was to become a right upon the death of Ms Sebata.  As Ms Sebata had not revoked the nomination, the “agreement” remained a valid agreement.  The court accordingly ruled that Ms Mkhabela’s estate was entitled to the proceeds of the policy upon Ms Sebata’s death.

Supreme Court of Appeal:

The executor of Ms Sebata’s estate pursued the case and appeal was lodged against the judgment of the full court.

The SCA held that the full court was correct in that Ms Sebata’s nomination of her mother as beneficiary of the policy was a contract for the benefit of her mother (third party), which benefit was capable of being accepted upon the death of the policy holder.  However, the full court erred when it held that Ms Mkhabela’s acceptance of her nomination had legal significance and force. 

The court held that a nominated beneficiary only acquires a right to the proceeds of a policy upon the death of the policy holder, prior to which the beneficiary only has a spes (an expectation) of claiming benefit of the policy. Should the nominated beneficiary die before the policy holder, the spes falls away, irrespective of whether the beneficiary accepted the nomination or not.  Consequently, no right to the proceeds vested in Ms Mkhabela (her estate in this case). The benefit remained with the insured and therefore vested in her estate upon her death.

The appeal succeeded with costs.

From the above it is clear that, should the beneficiary predecease the policy holder, who then does not replace the deceased with a new beneficiary, the insurance company will pay out the benefits under the policy to thepolicy holder’s estate.

 
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Posted by on 10/04/2012 in Content

 

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THE ESSENTIALIA OF PARTNERSHIPS

The essentialia of a partnership were set out in the case Joubert v Tally and Company 1915 some time ago.  The four essential elements are:

1)     Each partner contributes something to the partnership, whether it be money, skills or labour.

2)     The business should be carried on for the joint benefit of the partners

3)     The objective of the partnership should be to make a profit

4)     The contract between the parties should be a legitimate contract.

The contribution made by each partner does not necessarily have to be of a monetary nature.  As long as such contribution has commercial value, it is acceptable.

With reference to the second element, “business” is defined as “anything which occupies the time, attention and labour of a person for the purpose of profit”.  Whether the business activity is of an indefinite nature or aimed at completing a single, particular project, a partnership can exist.  The concept of “joint benefit” illustrates that a partnership can only exist if all the members thereof benefit from the business activities of such a partnership.  Therefore it is deduced that each partner must share in the profits as well as in the losses of the partnership.  One partner cannot benefit from the profits while another is responsible for all the losses.  The latter concept is, after all, not recognised in South African law.

In the case Ally v Dinath 1984 (2) SA 451 (T) it was reported that the following would suffice as “carrying on business to make a profit”:

1)     a pure economic/financial profit motive

2)     a joint effort in order to save costs

3)     to provide for the livelihood and comfort of the parties and their children

4)     the purpose to accumulate an appreciating joint estate

The above clearly excludes charitable and welfare institutions as well as sports clubs from the partnership list.

The agreement concluded by the parties to a partnership must be valid.  The agreement must contain the essentialia of a partnership.  Furthermore, the parties involved must have the intention to establish a partnership.  Should the agreement not be indicative of the nature of the relationship between the parties, the subsequent conduct of the parties can be referred to. This may very well paint the true picture of the parties’ intention.

Although the parties may agree, whether it be by verbal agreement or in writing, on certain formalities concerning the parties and the relationship between them, should the essential formalities not be complied with, no partnership would have been established.

In South African law, a partnership is viewed according to the aggregate theory of partnership, which means that a partnership is regarded as a collection of individuals and not an entity.  Therefore, a partnership does not enjoy legal personality, as it is the individual partners in their personal capacities who are co-owners of assets and jointly and severally liable for losses.

One of the exceptions to the lack of legal personality of a partnership is in the case of insolvency of the partnership estate.  According to Section 13(1) of the Insolvency Act 24 of 1936, if the partnership estate is sequestrated by a court, the personal estate of every partner will simultaneously be sequestrated.

With regards to the personal liability of the individual partners the following applies:  each of the partners is jointly and severally liable for all partnership debts.  The case of Geldenhuys v East and West Investments (Pty) Ltd 2005 (2) SA 74 (SCA) is relevant in this instance.  The facts of the case in short are that the appellant, an attorney, was ordered by the court to pay his previous landlord a sum of R36 761.10 in respect of arrear rental.  The attorney’s partner had settled a larger amount with the landlord.  The question which then arose was to what extent the appellant was liable?  The court ruled that the partners could be held jointly and severally liable for the full amount of the disputed debt and therefore the landlord could, and should, sue both the partners.  Subsequently, judgement was given against both partners.

During the existence of the partnership, the partners are co-debtors and jointly and severally liable for all partnership debts.  Creditors must sue all of the partners and cannot institute action against only some of the partners.  However, as soon as the partnership is dissolved, this rule falls away and the creditors may seek satisfaction for their claims from the individual assets of any of the partners.

 
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Posted by on 30/03/2012 in Content

 

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MORTGAGE BONDS: IS THE TIFFSKI JUDGMENT A BANK’S WORST NIGHTMARE?

MORTGAGE BONDS: IS THE TIFFSKI JUDGMENT A BANK’S WORST NIGHTMARE?

A recent judgment handed down by the Supreme Court of Appeal on 30 September 2011 has laid bare the effects of non-compliance with the requirements of Section 34 of the Insolvency Act and should arguably sent shivers down every buyer, banker’s and conveyancing attorney’s spine.

Not only was the sale and transfer of the assets of a business, which was subsequently liquidated, declared void ab initio, but so too the mortgage bonds registered in favour of the bank financing the transaction.

A proper due diligence investigation into all relevant issues is thus of utmost importance when assisting a buyer or a bank evaluating it’s security. It proves that “possession cannot be regarded as “10 points of the law” and possession and even ownership and the security of a mortgage bond can be set aside by a ruling of a court. A bona fide buyer or bank are most likely to be un-aware of a pending liquidation or insolvency of a seller, which liquidation or sequestration can take up to six months to come to conclusion after the sale and full payment of a purchase price has taken place.

The facts of the case can be summarised as follows:

FACTS

• Tiffindell Ski Limited (the company) concluded an agreement of sale with Tiffski Property Investment (Pty) Ltd (Tiffski) on 12 July 2007 in which it sold to Tiffski the immovable property on which it conducted a hotel and resort enterprise along with the said business enterprise (the subject matter).

• The written agreement of sale contained terms quite common in many such agreements and to the effect that possession, occupation and control would be given to Tiffski on the date of transfer, that the agreement would not be published in term of Section 34 of the Insolvency Act, that the company would continue to conduct its business pending transfer and that the agreement represented the entire agreement between the parties.

• Registration of transfer subsequently took place on 16 September 2008 simultaneous with the registration of two mortgage bonds in favour of the State Bank of India Limited (the Bank).

• The company went into liquidation on 23 October 2008 and its liquidators challenged the validity of the transfer of the subject matter and the registration of the mortgage bonds against themselves, arguing that it was void as against them on the grounds that (1) the company went into liquidation within 6[six] months from the transaction (2) the transfer was not in the ordinary course of business (3) the transfer of the business was not for the purpose of securing the payment by the company of its debts and (4) the required notice was not published as set out in Section 34 of the Act.

COURT’S FINDINGS

Upon accepting the liquidator’s arguments, the court rejected Tiffski’s contentions that it was not a “trader” as defined in the Act, that the transaction was in the ordinary course of business, that the transfer fell outside of the 6 month window contemplated in the Act and that due to the transaction being common knowledge it was not necessary to advertise.

It placed specific emphasis on the Bank’s role when considering the validity of the mortgage bonds and rejected the claim by the Bank that it was unaware of the company’s financial difficulties at the time it approved the disputed mortgage bonds. The Bank further contended that the bonds passed by Tiffski over the immovable property transferred from the company constituted real rights in the said property that served as its only “real security” for the monies lent. Thus any order voiding the mortgage bonds would cause it irreparable financial harm.

The Bank sought to rely on a number of court decisions for the proposition that the validity of a mortgage bond duly registered in the Deeds Office is not dependent on the validity of the antecedent contract, a contention that the court also rejected. According to the court in this instance, it is trite that no legal consequence flow from a void jural act. The court stated that “As Tiffski did not acquire ownership of the company’s immovable property – on account of the voidness of the transfer – it must logically flow that Tiffski could not in turn grant any rights, let alone real rights, in the immovable property to the Bank”.

The court then further slammed the Bank saying that it should have insisted on publication of a notice in terms of Section 34 and this being expressly excluded in the agreement of sale must have been done with the Bank’s approval or acquiescence. It was the opinion of the court that to uphold any argument advanced by the Bank in its defense would “defeat the very purpose which the Legislature wished to achieve in enacting Section 34 (1) and benefit the Bank at the expense of the company’s creditors. The Bank must accordingly be taken to have consciously assumed the risk of the transfer of the company’s business to Tiffski falling foul of the legislative requirements and nevertheless agreed to advance moneys to Tiffski fully aware of the risk in doing so.

CONCLUSION

In future, any bank or money lending institution should do well to take head of the court’s hardline approach applied in this case and as the usual remedies relied on in cases of this nature fell on deaf ears in favour of the rights of the company’s numerous creditors. It could in fact signal the start of a growing trend to protect creditors and restrict lending even further, warning any bank to tighten its mechanisms for due diligence, information control and mortgage bond approval criteria even further.

Conveyancing attorneys who attend to the registration of mortgage bonds must also be aware of the risks associated with the registration of a mortgage bond when a court rules the security void, due to non compliance of legal requirements.

With special thanks to Daan Steenkamp.

For the full judgment visit http://www.saflii.org/za/cases/ZASCA/2011/187

 
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Posted by on 03/11/2011 in Content

 

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