Property ownership remains a pipe dream for many South Africans but a new product launched by FNB could change all that as it allows as many as 12 friends and/or family members to invest in property together.
The reality is that starting the property ownership journey remains expensive with a number of added costs, other than the bond for the property. FNB's new product aims to address the issue, in much the same way the more commonly known stokvel does as an informal affordable housing solution for many communities - except it is done through a reputable banking institution.
Lee Mhlongo, CEO of FNB Property Finance, says, “ Our records show that when a customer considers purchasing a property, they tend to forget all the other additional costs included in their home loan such as registration costs, transfer duties and sometimes a deposit, presenting more barriers for one to afford the property.
'Shared costs, and reduced monthly repayments and personalised rates'
"The advantages of buying a property collectively with friends and family means that customers are now able to share the costs equally to make the purchase and the process affordable. Another advantage is that customers will also enjoy reduced monthly repayments and personalised rates.”
Collective buying applications can be submitted via the FNB App on nav »Home. This permits up to 8 applicants, inclusive of applicants who are married in Community of Property (COP) to be added. Should the number of applicants exceed 8 parties, this can be applied directly via the FNB channel such as a branch.
But what are the risks?
According to FNB, all names of participants would be on the title deed and all credit profiles checked, as well as affected if any individual in the collective defaults on bond payments.
While the bond agreement would be the legal agreement with the necessary terms and conditions, there are other considerations to protect each applicant using this Collective Buying product.
Mfundo Mabaso, Growth Head for FNB Secure Lending says, "There will be customer financial education and education so all participants are aware of the implications. Each participant will also receive free will, so they can stipulate what would happen to that person's portion of the property should they die.
"It is also important that each participant takes out credit Life insurance, so they are covered in the event of retrenchment.
'Buy with people you can trust'
Legal Expert Simon Dippenaar says the key to collective buying is buying with people you can really trust.
"This is a good type of investment considering that it's coming from a reputable financial institution. However, it is important to note that FNB is only offering the finance of the property to the number of members willing and able to invest,
"The solution allows investors to elect and deposit funds directly into one transactional account and to run debit orders or to request a stop order payment from their transactional accounts. FNB has split billing functionality which allows multiple parties to pay on various dates at specified contributions.
Dippenaar says, naturally with all types of financial investments, there are risks and responsibilities which cannot be overlooked before deciding to invest.
When evaluating the risks involved, he says there are three crucial questions to ask oneself:
1. What am I investing in?
"Knowing the type of property you will be investing in is important. Factors like buying in the right area, and for the right market are essential, especially if the aim of the investment is to gain rental income. Other crucial aspects to consider are the interest rate, the operating expenses vs the operating income, the insurance component to the property and your return.
2. Who am I investing with?
"Knowing the other investors is equally important. Each member’s credit profile including their nature of income, expenses, household size and affordability needs to be assessed, in conjunction with the credit bureau profiles and the information on the account holders conduct with various creditors and banks. The other investors need to be reliable when it comes to payments otherwise the issue to defaulting members and penalization for defaulting arises, and how that, in turn, impacts each member.
3. What do I stand to lose?
"A clear exit structure needs to be set out in the event that any member is unable to invest further. This structure should also set out what happens in the event of death, divorce, and insolvency.
'Know who will be administering the collective property
As a cautionary measure, Dippenaar says it is also important to ask who will be administering the collective property purchase.
"In considering the issue above, it may seem like a trust would be ideal in this situation. It allows for continuity; can protect an individual’s assets from creditors and/or matrimonial and relationship disputes; the utilization of services, knowledge and abilities of trustees; custodianship of assets, preventing assets from being squandered; management and control of trust assets; tax benefits can be created by the correct distribution of income and capital gains, and lastly, the estate duty can be minimized or capped because the growth of an asset is no longer in the hands of a moral person.
'A trust can be costly'
"However, there are downsides to having trust as well. The formation and administration of trust are costly; a higher rate of income and capital gains taxes on distributions, if retained in the trust; the possibility of future legislative amendments which may adversely affect the benefit of the trust; administrative and taxation requirements such as:
– annual financial statements
– annual income tax return
– bi-annual provisional tax returns
– onerous duties of trustees.
'Weigh up what protection is best suited'
Dippenaar says, "Entering a trust would take more of what you stand to gain. You will therefore need to weigh up what protection is best suited for this type of investment, which FNB could answer.
"With that said, the terms and conditions of the agreement will ultimately be the constitution of this investment and will need to be scrutinised in great detail.
If all the risks and responsibilities are fully considered and all members are to abide by the constitution of this investment, then it may be very profitable both short term and long term. The key to collective buying is buying with people you really trust and those with strong credit profiles.
"It is a good time to take advantage of the buyer’s market as well as the low-interest rates."
“We urge customers to take advantage of buying as a collective and start their journey to own property. This is another way we are helping our customers to own their dream home and unlock their wealth creation journey, through investing in property as a group. Customers that fall within the ‘gap housing market’ whose income is between R3 501 - R22 000 are still encouraged to consider FLISP, a government homeownership assistance programme. The benefit of a cash contribution from such a programme can significantly reduce the financial burden on households,” says Mhlongo.
How to apply on the FNB APP:
'Each applicants credit profile reviewed'
Once the application has been submitted, the bank will review each customer's credit profile including the nature of income, expenses, household size and affordability. These are assessed in conjunction with credit bureau profiles and the information on the account conduct with various creditors and banks. The solution allows for customers to elect and deposit funds directly into one transactional account and to run debit orders or to request a stop order payment from their transactional accounts.
"Furthermore, FNB has split billing functionality which allows multiple parties to pay on various dates at specified contributions."
Step 1: Log into the FNB App and tap navigate life in the menu
Step 2: Click on nav>> Home and tap apply for a home loan
Step 3: View welcome and take note of the documentation needed
Step 4: Enter your details and tap on confirm applicant summary details
Step 5: Confirm if you were referred by a Sales consultant
Step 6: Enter the details of the property you want to purchase
Step 7: Enter the loan details and confirm if you would like to add a co-applicant
Step 8: Enter tax details, employment details, income and expense and debit order details
Step 9: Click to accept the terms and conditions and upload application documentation. That’s it your applicant has been submitted
Why would FNB launch this product now?
According to Siphamandla Mkwananzi, FNB Senior Economist, there are two key things happening in the property market right now.
"At a global level, things are still in the rebound phase. Large parts of SA's recovery is tied to our trading partners who are now recovering to a pre-pandemic level, supporting domestic demand. The recovery is fragile and not without imperfections both globally and locally. The risks of the fourth wave and electricity and energy supply constraints are the biggest risks for SA.
Mkwananzi says Property Market activity in 2021 is concentrated in the middle to the higher end of the market, contrasted to the previous activity of the lower-income markets during 2020.
He says that while job losses concentrated in the low-income sector of the market are affecting trends, activity levels are still above pre-pandemic levels when it comes to demand.
And yet repossessions and distressed sales have not materialised as expected.
According to Mkwananzi, supply in the 2008 economic crisis says a lot of repossessions. But this is not true for the Covid-19 pandemic.
"The rate cuts have had a big influence on this trends, as well as the support of lenders who have given payment holidays and debt support to homeowners during this economic pressure.
According to FNB internal indicators, Low interest has rippled across all age groups, assisting younger buyers in the first wave of 2020, to now seeing older buyers investing in secondary properties. Mkwananzi says the property market has seen the "best of what the low-interest rate can offer in terms of stimulating new demand".
Market-wide data shows on average the full effects of the low-interest rate should filter through the entire economy by the end of the year, as activity can now be seen across all age groups.
"Shift in consumer behaviour is keeping activity above the pre-pandemic level, especially when it comes to the trend of work from home, lending support to homeownership, not just locally but globally. FNB expects demand for home loans to remains at levels above the pre-pandemic levels, although impacts on the labour market could heavily impact this going forward.
Mabaso says during an economic crisis the "affordable housing market is affected disproportionally higher "than the rest of the market. He says there is also a sense of consumers not being aware of financial assistance and a lack of access to proper financial education.
Add to that, there are very low margins in the development space of the affordable housing space, impacting the supply of this sector.
Mabaso says FNB is actively looking to address these issues through Products like Collective Buying as well as the following initiatives:
- Builder Connect – to assist emerging developers, thereby broadening the supply of affordable housing – this will be launching soon
- Title Deed Solution – partnering with the Transaction Support Centre, Khaya Lam and Government on this to drastically reduce the title backlog in SA
- Tribal Land Tenure – at an advanced stage of concluding a solution that will enable customers living on tribal land to have an instrument that can be registered at the deeds office and thereby enable them to bond their properties, enabling access to home finance.