It might be more favourable to rent the property than to own it. The assumption made by most people is that the profit will be achieved on selling the premises, based on property growth. They think that this will easily offset the outlay in leasing; however this is not always true.
Some disadvantages include:
Commercial property loans range from 60% to 75% of the banks valuation or the purchase price, whichever is the lowest and in most instances the banks valuation takes preference;
- A commercial property mortgage bond has to been repaid over a period of 10 years. There are some financial institutions that will consider a 15-year repayment period, obviously with certain limitations and restrictions. Interest rates are higher than that of residential properties;
- Other than the purchase price there are various costs involved in the transfer of property in South Africa. The “transfer costs” relate to the costs of the transferring attorney. They are calculated on a sliding scale regulated by a tariff and normally amount to between 1% and 2% of the purchase price. Transfer duty is payable by the purchaser;
- As the owner of the property you will be solely responsible for the maintenance and security of the business.
The advantages to purchasing your own premises:
- As the owner you cannot be evicted from your property;
- Tax benefits from deducting holding costs, such as rates and taxes, insurance, monthly interest and other maintenance costs;
- Long-term capital appreciation;
- Reliable, market-related rental income;
- The possibility of a post-retirement income from the property.
Transferring property into someone else’s name
You can apply for a Substitution of Debtor on a joint bond. Section 57 of the Deeds Registries Act 47 of 1937 makes provision for substituting one mortgagor with another. It costs about 50% less than having to register a completely new bond.
However, most banks hesitate to entertain “substitution of debtors” transactions. The reason for this is that they may worry that their security will be compromised if the mortgage bond document is merely changed to reflect the new mortgagor.
Application for a Substitution of Debtor
When an application for Substitution of Debtor is made and one party is deceased, the application will be referred to the Deceased Estate Division of the bank. They will look at your affordability before they will proceed with the application. If, for example, you are self-employed, it will be much harder to get approval.
If you are having difficulties with the application lodged through ASBA, they suggest that you contact their Processing Unit on 0861 732 273 and request a complete list of attorneys who are listed on the ASBA Panel of Attorneys. From the list you can choose an attorney to proceed with this application on your behalf. (You are also free to choose your own attorney as well).
Even if you have a good credit history and own bond free property there are many reasons why a bank may still find it necessary to decline a bond application. “If you are self employed, the requirements are much more difficult to meet that someone who is a salaried individual. When someone earns a fixed salary it is much easier to prove income,” says Michelle Sloan, Marketing Manager, SA Home Loans.
Affordability could be the problem
“If the deceased party had insurance to cover the bond, there wouldn’t have been a problem. The most obvious reason for the declined bond applications were most probably affordability”, explains Emlyn Metherell, Property Consulatant for ABSA Bank.
It would be a good idea to shop around. “People always go to their own bank, after all the client feels it’s an advantage that the bank knows them. They put all their faith in one bank but they should in fact shop around. Don’t limit yourself to commercial banks but also approach mortgage bond specialists”, advises Sloan.
There is another alternative in order to get a bond approved. If the bank has any doubts about your ability to repay the loan, you may know someone who would be able to sign surety for you. This person would take responsibility for the loan if you fail to repay it.
Whether you are single or married you can buy fixed property and register it in only your name or in more than one name. If married out of community of property you can register property and a bond in the name of either or both.When married in community of property, you have no choice – registration must take place in both names. There are also various tribal laws that can influence how property is registered.
You must be over the age of 21 to own fixed property.
Benefits of Individual Ownership
- It is the safest form of ownership
- The registration process is straight forward
- Transfer duty is less than some of the other types of ownership
- Buying property with others can give you the opportunity to get into the property market that you may not be able to afford on your own
The downside of individual memberships
- Legal action by creditors of any of the owners can force owners to sell the property to cover the debts of one of the parties. (up to the value of his/her share in the property.)
- Estate duty is high, 25% for estates in excess of R1 million.
- Capital Gains tax is payable on the sale of a property.