Alternative Finance Models

Alternative Finance Models

You’ve found your dream home or residential investment property, had your offer
accepted, and now you need finance. Here are some ideas on how to secure the
financing you need to make that purchase possible.

Your first port of call might be your bank or, better yet, a bond originator who will submit
your application to several banks and shop around at no cost to you, to get a home loan
at the best possible rate. If your credit rating is good and you can afford the monthly
bond repayment, your application should be successful, right?

Unfortunately, this is not always the case. Only a fraction of aspirant home buyers
qualify for bank home loans and banks are offering lower bonds to many who qualify, so
there is no guarantee you will get the financing you need.

Banks consider many factors when they assess home loan applicants, including stability
of income, source of income and age. So if you are self-employed, freelance, work on
contract or earn foreign income, or if you are a foreigner or expatriate, your application
may very well be turned down despite your creditworthiness and being able to afford the
instalment. Or you may be offered a lower loan amount.

Knowing your options

In this case, there are several options to consider. If the bank grants a lower bond, you
could take a personal loan to make up the shortfall in deposit. However, this is
expensive. It may also reduce your affordability profile so that the bank withdraws the
home loan. Dipping into your long term savings and borrowing money from family or friends are also options. If you take money out of your business, there is less working
capital, and this reduces the return earned from the business.

Another option is to apply for financing from a non-bank financier. Your individual
situation would be assessed and, provided you meet credit and affordability
assessments, you could be granted finance of up to 95% of the price of the home. Now
there is another option for home buyers. Cape Town based company Sentinel Homes
has begun offering home finance based on instalment sale. They will assess your
unique situation and, provided you meet credit and affordability requirements, you could
be granted a home loan of up to 95% of the price of the home.

Like with a bank bond, you would pay a monthly instalment which should be similar to
what the bank’s bond payment would have been within the same parameters. Unlike a
bank bond, the balance of your loan must be settled in full after 120 months. At that
stage, you will likely qualify for bank funding at a reduced rate and reduced repayment.
It may also be possible to extend the loan for a further term.

How it works

Our model is based on instalment sale finance, the same concept used to finance motor
vehicles and other movable consumer goods. This does not change the home purchase
process, which proceeds as usual: you find a home and sign an offer to purchase. If the
offer is accepted, you approach a bank or bond originator for a home loan. If the bank
offers a smaller bond or declines the application, you apply to Sentinel for finance. If
approved, the sale is concluded and, after the relevant conveyancing process, you
move in.

Your monthly instalment for the duration of the repayment term comprises the interest
due on the principal, a portion of capital and a monthly service fee, just like with a bank
home loan. Interest is levied at competitive interest rates linked to prime.

Unlike with a bank home loan, Sentinel remains the registered owner of the property
until the final instalment is paid. This has no practical effect on you as the homeowner,
as long as the instalments are paid. If you default on payment, an arrangement must be
made immediately to address the arrears.

When looking for a non-bank financier, it is important to find one that has the financial
backing of banks, which perform stringent financial checks. It must also comply with the
National Credit Act and the consumer protection framework codified in the Alienation of
Land Act. In this way, your home is secure, no matter what happens to the finance
company.

Crunching the numbers
Let’s look at an example. Mr A needs finance to purchase a home worth R1 million.
Assuming Sentinel Homes approves a 90% home loan, the cash Mr A will require is
R135 263. The only difference with an instalment sale home loan is that Mr A will not
have to pay bond registration fees.

COSTS
● Price of home
● Transfer duty
● Transfer fees
● Bond fees
● Origination fee

R1 000 000.00
R3 000.00
R24 279.00
R0.00
R6 037.50
TOTAL R1 033 316.50
LESS 90% finance
capital

– R900 000.00

CASH REQUIRED R135 263.50

This new offering makes home loans more accessible at affordable pricing. It is no
longer the end of the road if a bank declines your application or offers less finance than
you need.

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