Buy a home like you would a car
Buying property on an instalment basis, rather than by taking out a mortgage, is gaining traction and a new finance company has entered the market offering loans for this old but relatively little-used method for property purchases.
Judging by the R900-billion mortgage bond market, South African banks seem comfortable sticking to providing home loans to consumers who buy the traditional way.
Instalment sales, provided for in terms of Roman Dutch law, are regulated under the Alienation of Land Act and have been traditionally used to finance low-cost housing and by developers selling their own stock.
Banks generally do not offer instalment sale finance.
Sentinel Homes CEO Renier Kriek has recently launched the finance offering for consumers who can afford to buy a property but who struggle to get bank financing because they are self-employed, foreign income-earners, lacking a credit record, or expatriates.
Kriek says that Sentinel Homes, launched in May, is broadening access to finance by offering loans for instalment sale purchases for properties between R500000 and R2.5-million for up to 95% of the value of the property, depending on the applicant's circumstances.
Loans will be made available initially to buyers in the Western Cape and will later be extended to other regions.
Gregory Connellan, a director at Chartwell Group, which has been offering instalment sale finance for properties in its own developments for the past 10 years, mainly in Gauteng and Durban, says legally there is not much difference between buying property on instalment and buying vehicles or furniture that way.
The cost of buying property through instalment sale is lower than buying property the traditional way because transfer duty is not paid upfront and bond registration costs do not apply, Connellan says.
The upfront cost of buying a R750000 property can easily be R35000, he says, whereas with instalment sale, the costs are less than R10000.
The upfront cost is lower than buying property the traditional way
Kriek says the difference between buying a property the traditional way and via his instalment sale offering is that with the latter you get to pay instalments over any term up to 20 years and enjoy the full rights and benefits of owning a property. However, full legal title only transfers into your name after you have paid the last instalment.
Connellan says although the title to the property is held by another entity, you become a buyer of the property through what is called a section 20 (of the Alienation of Land Act) endorsement on the title deed. After paying the last instalment, the buyer gains title to the property.
If you apply for finance from Sentinel, the company will assess your creditworthiness and if you are eligible, offer you a loan over 20 years with an interest rate linked to the prime lending rate, says Kriek.
The interest rate is slightly higher than the bank rates by a margin of about 1.5% to 2% due to Sentinel offering higher finance amounts than the banks.
Sentinel's target market is consumers who can afford to buy property but do not meet the banks' lending criteria.
Although Sentinel amortises the total amount financed over 20 years, the company's funding model is that the balance is due in full as a balloon payment after 10 years. Home buyers can settle the balance either with their own capital or a bank loan, or they can sell their home. It may also be possible to extend the loan from Sentinel subject to a good payment history, Kriek says.
"Trends show that mortgages are settled from home sales on average every eight years, so this arrangement would suit the average homeowner who is likely to qualify for bank funding at a reduced rate at this stage," Kriek says.
"To sell a home before the finance is repaid, the selling price must be sufficient to cover the outstanding debt with Sentinel," he says.
Properties financed by Sentinel can be let with the company's approval. Sentinel also assesses tenants' creditworthiness and ability to afford the rent to protect both the home buyer and the company.
After paying the last instalment, the buyer gains titleG
Sentinel is financed by investors and South African banks, which perform stringent financial checks before providing finance, Kriek says. In addition to complying with the National Credit Act, as would a mortgage lender, Sentinel also complies with consumer protection provisions in the Alienation of Land Act, he says.
The consequences for not keeping up with monthly instalments with Sentinel would be similar to defaulting on a home loan in that the property would be sold to settle the outstanding amount.
The difference, according to Kriek, is that unlike bank repossessions, there is no time pressure for selling because Sentinel is the owner of the property and will ensure the property is in a good saleable state to realise the maximum market value. Sentinel is also not legally obliged to follow the cumbersome judicial sale process, in which a sheriff's auction is held.
Sentinel does not charge early settlement penalties as mortgage lenders do if you repay your home loan earlier. The fees charged by Sentinel include a mortgage origination fee and monthly administration fees as prescribed by the NCA. Except for the fact that Sentinel cannot charge early settlement penalties, the fee structure of an instalment sale home loan, as prescribed by the act, is identical to that of a mortgage.
If a buyer wants to renovate their property, the building plans must be approved by Sentinel. The increased value of the property accrues to the consumer who would realise the added value when the house is sold.
Kriek says the money of a buyer is safe. Even if Sentinel were to be liquidated, buyers would be safe in their homes as long as they continued to pay their instalments because the Alienation of Land Act states that instalment sale contracts cannot be cancelled in the event of liquidation. Furthermore, the rights of buyers are registered against the title deed.