Plett scores as Top Destination!
PLETTENBERG BAY SCORES AS TOP DESTINATION
Plettenberg Bay has walked away with two accolades in the annual TripAdvisor Travelers’ Choice Destination Awards. Plettenberg Bay was voted the third best Beach and Sun Destination in Africa and also made the top ten list in the Outdoor and Adventure category when it was voted as the eighth most popular wildlife destination in Africa. According to Bitou Tourism CEO Dianna Martin, these accolades could not have come at a better time. “We have always promoted Plettenberg Bay and surrounds as an all-year destination with unique attractions and offerings and this recognition from TripAdvisor is a superb validation of our belief that we can offer visitors holiday experiences of world-class quality.
06 October 2010
05 October 2010
FNB Property Barometer - Estate Agent Survey
The latest FNB Estate Agent Survey for September 2010 reflects growing pessimism in the industry as the recession continues to bite.
Economist John Loos summarises the effect on holiday regions as follows:
"All 3 forms of non-essential buying remain unchanged as a
percentage of total buying from the 2nd quarter survey, i.e. buyto-
let buying accounting for 7% of total buying, holiday property
buying 2%, and buying for relatives 1%. However, from the 1st
quarter of 2007, buy-to-let is down from 10%, and both holiday
buying, as well as buying for relatives, down from 5%.
The shift in the composition of total buying away from nonessential
buying has had a profound impact on smaller holiday
property-driven regions".
Read John Loos' full report....
Economist John Loos summarises the effect on holiday regions as follows:
"All 3 forms of non-essential buying remain unchanged as a
percentage of total buying from the 2nd quarter survey, i.e. buyto-
let buying accounting for 7% of total buying, holiday property
buying 2%, and buying for relatives 1%. However, from the 1st
quarter of 2007, buy-to-let is down from 10%, and both holiday
buying, as well as buying for relatives, down from 5%.
The shift in the composition of total buying away from nonessential
buying has had a profound impact on smaller holiday
property-driven regions".
Read John Loos' full report....
19 October 2009
Tax Concession - Trust, Co or CC
Introduction
There was a time when there were advantages to owning property through a company or a close corporation. Instead of selling the property, one could sell the shares/members interest and loan accounts of the company or close corporation which would mean that the purchaser did not pay transfer duty. This resulted in the purchaser saving large amounts of money and accordingly one could either ask for a higher selling price or sell the “property” easier. However in 2002 legislation was passed in terms of which a company, close corporation or trust which owns residential immoveable property is treated as if it is immoveable property. This designation means that the sale of the trust or the shares or members interest and loan account in such company or close corporation is subject to payment of transfer duty calculated on the value of the immoveable property.
With the introduction of capital gains tax (CGT) in 2001 companies and close corporations were placed at a disadvantage in relation to individuals in that they could not claim the primary rebate (at present R1 500 000.00) provided to individuals on their primary residence. Further the effective rate for capital gains tax payable by a company or close corporation is higher than the rate payable by individuals.A further disadvantage is that when a company or close corporation disposes of its property and proceeds to distribute the profit to its shareholders or members, the company or close corporation pays secondary tax (STC) or dividends tax. Furthermore in terms of the Companies Act of 1973 an annual fee is paid by companies.
In light of the above the owning of residential property through a company or close corporation no longer makes sense. As a result of this more individuals wish to transfer their properties out of their companies into their own name. At present if a company or close corporation were to transfer a property to an individual it would be liable for CGT and STC or Dividends Tax and the individual purchasing the property would pay transfer duty. Now with the passing of the Taxation Laws Amendment Bill of 2009 individuals will from the 1st January 2010 for a period of two years be able to acquire property from their company, close corporation or trust without such entity paying STC or Dividends Tax or CGT. In addition, no transfer duty will be payable. Effectively the liability for the capital gains will roll over to the purchaser i.e. the base cost for the property will be what the base cost would have been for the seller. This will only be applicable when the purchaser sells the property and the purchaser will have the benefit of the primary residence exclusion.
How to qualify
To qualify the Bill requires the following:1. The property must be the sole asset of the company or close corporation or trust;2. The property must be a residence used exclusively for domestic purposes. Effectively the property must be your primary residence. Residence includes “any structure including a boat, caravan or mobile home which is used as a place of residence by a natural person, together with any appurtenance belonging thereto and enjoyed therewith”.3. An interest in a residence must be transferred from a company, close corporation or trust to a natural person.4. Shares or member’s interest must have been held directly by a natural person alone or together with his/her spouse or by a trust.5. Period – The company, close corporation or trust must have owned the property on or before 11 February 2009 and must distribute the property between 1 January 2010 and 31 December 2011.
Application of the Bill does not apply
The Bill will not apply where:1. The company has more than one shareholder or the close corporation has more than one member;2. The company or close corporation owns more than one property;3. Where the shareholder of a company is not a natural person or trust but a legal entity
Trusts as shareholders of company
Originally the Bill did not cater for residences owned by companies which in turn were owned by a trust. However the concession now also extends to trusts. Consequently the Act provides that a company which owns a residence and whose shares are held by a trust may distribute the property to the individuals who are the beneficiaries of the trust without adverse tax consequences.AdvantagesAt present a company or close corporation pays STC and CGT without any primary rebate and the purchaser pays transfer duty.
Now if the property qualifies for the concession the seller will have the benefit of not paying the following:
CGT – The seller will not pay CGT on the transfer of the property to the individual natural person. However the individual is not exempt from CGT. The CGT that would have been paid by company is effectively transferred and rolled over to the individual who takes the transfer of the property. Thus the individual will ultimately become liable to pay CGT on the sale of the property. However if the individual maintains the property as his/her primary residence he/she will now have the benefit of the primary rebate of R1 500 000.00 provided for CGT.
STC – On the sale of the property the company or close corporation would distribute the profits to its shareholders. Such award would constitute dividend for STC purposes. Under the amendment the individual will not be liable for STC.
Transfer Duty – Prior to the passing of the Bill the purchaser would be liable for transfer duty on the sale of the property. If the transfer of the property is done within the period there will be no transfer duty payable on the transaction.DisadvantagesAlthough the concession is very generous there is a disadvantage in respect of properties that are owned by trusts. Once the property is transferred into the beneficiaries own names their personal estate is increased which results in an increase of their estate for estate duty purposes thus undermining the objective of creating a trust.
Cost involved
The purchaser will still incur other ordinary costs of transfer such as conveyancing fees. Since there would be no purchase price the calculation of fees would likely to be based on the municipal value of the property. If the property was mortgaged to secure a loan the shareholder or member would need to discharge the loan and pay for the bond cancellation. The purchaser could apply for a new loan to be secured by the registering of a mortgage bond against the Title Deeds of the property. The cost of registering such bond would also be borne by the shareholder or member.
Information supplied by Dykes van Heerden, Attorneys
E-mail: info@dykedsvanheerden.co.za
Web: http://www.dykesvanheerden.co.za/
There was a time when there were advantages to owning property through a company or a close corporation. Instead of selling the property, one could sell the shares/members interest and loan accounts of the company or close corporation which would mean that the purchaser did not pay transfer duty. This resulted in the purchaser saving large amounts of money and accordingly one could either ask for a higher selling price or sell the “property” easier. However in 2002 legislation was passed in terms of which a company, close corporation or trust which owns residential immoveable property is treated as if it is immoveable property. This designation means that the sale of the trust or the shares or members interest and loan account in such company or close corporation is subject to payment of transfer duty calculated on the value of the immoveable property.
With the introduction of capital gains tax (CGT) in 2001 companies and close corporations were placed at a disadvantage in relation to individuals in that they could not claim the primary rebate (at present R1 500 000.00) provided to individuals on their primary residence. Further the effective rate for capital gains tax payable by a company or close corporation is higher than the rate payable by individuals.A further disadvantage is that when a company or close corporation disposes of its property and proceeds to distribute the profit to its shareholders or members, the company or close corporation pays secondary tax (STC) or dividends tax. Furthermore in terms of the Companies Act of 1973 an annual fee is paid by companies.
In light of the above the owning of residential property through a company or close corporation no longer makes sense. As a result of this more individuals wish to transfer their properties out of their companies into their own name. At present if a company or close corporation were to transfer a property to an individual it would be liable for CGT and STC or Dividends Tax and the individual purchasing the property would pay transfer duty. Now with the passing of the Taxation Laws Amendment Bill of 2009 individuals will from the 1st January 2010 for a period of two years be able to acquire property from their company, close corporation or trust without such entity paying STC or Dividends Tax or CGT. In addition, no transfer duty will be payable. Effectively the liability for the capital gains will roll over to the purchaser i.e. the base cost for the property will be what the base cost would have been for the seller. This will only be applicable when the purchaser sells the property and the purchaser will have the benefit of the primary residence exclusion.
How to qualify
To qualify the Bill requires the following:1. The property must be the sole asset of the company or close corporation or trust;2. The property must be a residence used exclusively for domestic purposes. Effectively the property must be your primary residence. Residence includes “any structure including a boat, caravan or mobile home which is used as a place of residence by a natural person, together with any appurtenance belonging thereto and enjoyed therewith”.3. An interest in a residence must be transferred from a company, close corporation or trust to a natural person.4. Shares or member’s interest must have been held directly by a natural person alone or together with his/her spouse or by a trust.5. Period – The company, close corporation or trust must have owned the property on or before 11 February 2009 and must distribute the property between 1 January 2010 and 31 December 2011.
Application of the Bill does not apply
The Bill will not apply where:1. The company has more than one shareholder or the close corporation has more than one member;2. The company or close corporation owns more than one property;3. Where the shareholder of a company is not a natural person or trust but a legal entity
Trusts as shareholders of company
Originally the Bill did not cater for residences owned by companies which in turn were owned by a trust. However the concession now also extends to trusts. Consequently the Act provides that a company which owns a residence and whose shares are held by a trust may distribute the property to the individuals who are the beneficiaries of the trust without adverse tax consequences.AdvantagesAt present a company or close corporation pays STC and CGT without any primary rebate and the purchaser pays transfer duty.
Now if the property qualifies for the concession the seller will have the benefit of not paying the following:
CGT – The seller will not pay CGT on the transfer of the property to the individual natural person. However the individual is not exempt from CGT. The CGT that would have been paid by company is effectively transferred and rolled over to the individual who takes the transfer of the property. Thus the individual will ultimately become liable to pay CGT on the sale of the property. However if the individual maintains the property as his/her primary residence he/she will now have the benefit of the primary rebate of R1 500 000.00 provided for CGT.
STC – On the sale of the property the company or close corporation would distribute the profits to its shareholders. Such award would constitute dividend for STC purposes. Under the amendment the individual will not be liable for STC.
Transfer Duty – Prior to the passing of the Bill the purchaser would be liable for transfer duty on the sale of the property. If the transfer of the property is done within the period there will be no transfer duty payable on the transaction.DisadvantagesAlthough the concession is very generous there is a disadvantage in respect of properties that are owned by trusts. Once the property is transferred into the beneficiaries own names their personal estate is increased which results in an increase of their estate for estate duty purposes thus undermining the objective of creating a trust.
Cost involved
The purchaser will still incur other ordinary costs of transfer such as conveyancing fees. Since there would be no purchase price the calculation of fees would likely to be based on the municipal value of the property. If the property was mortgaged to secure a loan the shareholder or member would need to discharge the loan and pay for the bond cancellation. The purchaser could apply for a new loan to be secured by the registering of a mortgage bond against the Title Deeds of the property. The cost of registering such bond would also be borne by the shareholder or member.
Information supplied by Dykes van Heerden, Attorneys
E-mail: info@dykedsvanheerden.co.za
Web: http://www.dykesvanheerden.co.za/
07 September 2009
Chas Everitt Introduces Unique Fly 'n Buy Package
Chas Everitt International Property Plettenberg Bay has introduced a unique Fly 'n Buy package for serious buyers wishing to purchase Plettenberg Bay property. This unique offer results in Chas Everitt reimbursing buyers for airfares, accommodation and car rental. The package conditions are available on Chas Everitt's websites such as http://www.everitt-plett.co.za/ and http://www.goosevalleygolf.com/. Simply click on the Fly 'n Buy logo in these websites and the PDF document will open providing full details of the qualifying procedure and applicable conditions.
John Fuller, Principal of Chas Everitt Plettenberg Bay says that although only just launched several buyers have already decided to make use of the offer. John says that even in tough market conditions estate agents need to be innovative to ensure that they proactively grow market share, and this offer ensures that our sellers improve their chances of selling their homes as quickly as possible. Chas Everitt has applied for registration of the Fly 'n Buy trademark so the product will be unique to the group.
08 August 2009
Huge Tax Break On Properties
Monique Vanek
27 July 2009
What you should know to transfer your property out of a company and get a 22% tax saving.
Seldom does the South African Revenue Service (Sars) open a tax-free window period, and rarely does it do it twice. So when it announced in a June draft amendment that individuals who own their primary residence in either a company, or a closed corporation (CC) can transfer their property tax free into their own name for the second time it came as a surprise and should be taken advantage of.
The draft amendment is likely to be finalised in the next few weeks, here's the lowdown. All individuals who own their primary residence in either a company or CC can transfer their property into their own name without having to pay capital gains tax (CGT), transfer duty and secondary tax on companies (STC) from January 1 2010 until December 31 2012. This is a huge tax saving of just under 22%.
They can only do this if their domestic residence is exclusively used for domestic purposes, says Mike Teuchert, a tax partner at Grant Thornton. However, "no clarification has been given to the meaning of the term domestic purposes, although it would exclude the situation where a person also uses their residence for the purposes of running a part-time small business", says Teuchert.
Unfortunately the exemption does not apply to those who own their primary residence in a trust, as was the case in the previous window period, however this could change in the final draft, notes Deborah Tickle, a member of Saica's National Tax Committee.
Also if the property is not in your own name you can not take advantage of the exemption.
For those who transferred their properties out of a CC, or company after the 2001 window period and before this new one starts you will not be reimbursed, says Tickle. Of course this exercise is not without costs, says Teuchert. You will still be responsible for costs associated with the transfer of you property, such as conveyancing fees and bond cancellation costs, reckons Teuchert.
So how do you go about transferring your property out of your CC or company? Firstly, you'll have to visit a conveyancing attorney to transfer your property, cancel your bond and register it in your own name. Secondly, you will need to make sure your books are in order and close them off. Thirdly, you will have to fill in a tax return and supply Sars with your latest set of accounts. Finally you will need to deregister your company with the Register of Companies, says Tickle.
Ntombikayise Baepi a senior associate at ENS reckons Sars has provided this second window period to cleanse the Register of Companies of inactive and dormant companies. Tickle says it has also done so to help individuals avoid the high costs of being a registered company when the Companies Act comes into full force next year.
27 July 2009
What you should know to transfer your property out of a company and get a 22% tax saving.
Seldom does the South African Revenue Service (Sars) open a tax-free window period, and rarely does it do it twice. So when it announced in a June draft amendment that individuals who own their primary residence in either a company, or a closed corporation (CC) can transfer their property tax free into their own name for the second time it came as a surprise and should be taken advantage of.
The draft amendment is likely to be finalised in the next few weeks, here's the lowdown. All individuals who own their primary residence in either a company or CC can transfer their property into their own name without having to pay capital gains tax (CGT), transfer duty and secondary tax on companies (STC) from January 1 2010 until December 31 2012. This is a huge tax saving of just under 22%.
They can only do this if their domestic residence is exclusively used for domestic purposes, says Mike Teuchert, a tax partner at Grant Thornton. However, "no clarification has been given to the meaning of the term domestic purposes, although it would exclude the situation where a person also uses their residence for the purposes of running a part-time small business", says Teuchert.
Unfortunately the exemption does not apply to those who own their primary residence in a trust, as was the case in the previous window period, however this could change in the final draft, notes Deborah Tickle, a member of Saica's National Tax Committee.
Also if the property is not in your own name you can not take advantage of the exemption.
For those who transferred their properties out of a CC, or company after the 2001 window period and before this new one starts you will not be reimbursed, says Tickle. Of course this exercise is not without costs, says Teuchert. You will still be responsible for costs associated with the transfer of you property, such as conveyancing fees and bond cancellation costs, reckons Teuchert.
So how do you go about transferring your property out of your CC or company? Firstly, you'll have to visit a conveyancing attorney to transfer your property, cancel your bond and register it in your own name. Secondly, you will need to make sure your books are in order and close them off. Thirdly, you will have to fill in a tax return and supply Sars with your latest set of accounts. Finally you will need to deregister your company with the Register of Companies, says Tickle.
Ntombikayise Baepi a senior associate at ENS reckons Sars has provided this second window period to cleanse the Register of Companies of inactive and dormant companies. Tickle says it has also done so to help individuals avoid the high costs of being a registered company when the Companies Act comes into full force next year.
01 August 2009
The best way to sell your property
Isn't it interesting how in these times we read that the best way to sell a property is by public tender or auction? The truth is that in a Buyers' Market it is only bargain hunters who attend auctions or submit tenders. Quite simply, they are the investors with cash and are looking for bargains. Auctions and tenders will only realise decent prices if the seller has a unique one of a kind property, such as the last piece of prime beachfront land.
I'll let you into a secret. The ONLY factor that sells property is PRICE! Price is relative to position, location, condition, age and other similar factors. If your property has not sold in the current market IT IS OVERPRICED. A few years ago there may have been 50 buyers in any month looking for property like yours. Today there are 20 buyers and they are comparing prices of all similar properties. If your property is overpriced it is compared to lower priced properties and those are the ones that are selling.
So, if you need to sell now, listen to a reputable Estate Agent and price your property competitively to sell in the current market. Estate Agents are not motivated to sell overpriced properties, but overpriced properties do fortuitously help them sell the better priced ones!
So what is the best solution? Deal with a reputable Estate Agent with a proven record of sales in your area, grant them a Sole Mandate and ensure that you receive a written marketing plan for your property. Make sure the mandate can be cancelled should the Agent not implement the marketing plan! Your Agent will then work hard on marketing the property, and spend money doing so, and is unlikely to accept a Sole Mandate appointment if the price is not market related.
I'll let you into a secret. The ONLY factor that sells property is PRICE! Price is relative to position, location, condition, age and other similar factors. If your property has not sold in the current market IT IS OVERPRICED. A few years ago there may have been 50 buyers in any month looking for property like yours. Today there are 20 buyers and they are comparing prices of all similar properties. If your property is overpriced it is compared to lower priced properties and those are the ones that are selling.
So, if you need to sell now, listen to a reputable Estate Agent and price your property competitively to sell in the current market. Estate Agents are not motivated to sell overpriced properties, but overpriced properties do fortuitously help them sell the better priced ones!
So what is the best solution? Deal with a reputable Estate Agent with a proven record of sales in your area, grant them a Sole Mandate and ensure that you receive a written marketing plan for your property. Make sure the mandate can be cancelled should the Agent not implement the marketing plan! Your Agent will then work hard on marketing the property, and spend money doing so, and is unlikely to accept a Sole Mandate appointment if the price is not market related.
Plettenberg Bay's Brackenridge Estate leads the way with penalty levy moratorium
John Fuller, Principal of Chas Everitt International Property in Plettenberg Bay says that the Brackenridge Homeowners Association in consultation with the Developers have taken a bold decision to provide a two year building moratorium to buyers of vacant stands in Brackenridge Estate. Brackenridge is one of Plett's most exclusive and secure residential estate developments. He says it is a commendable move that will hopefully attract more buyers to Brackenridge.
Brackenridge Estate has sold very well and approximately eighty new homes have already been built, but the original deed of sale provided for penalty levies if houses were not built within a required time frame. These penalties were implemented against many owners, but for 2009 (expiring in February 2010) a moratorium on penalty levies was granted to assist owners during the current economic crisis.
Fuller said that while this moratorium assisted existing investors, it affected the interest of potential new buyers who require clarity regarding the imposition of penalties beyond 2008. He said that as an estate agent he had made suggestions to the Homeowners' Association and he hoped that other developers would realise that the secondary residential property market had changed forever and it could be a very long time before a sellers' market is seen again. If bold decisions were not taken to encourage buyer interest, demand would decline further, negatively affecting the value of all properties in the developments. Brackenridge's decision will therefore hopefully increase demand for stands in the development from serious buyers, help to underpin declining stand prices and also boost construction activities on the Estate.
The communique from the Chairman of the Brackenridge Homeowners' Association states:
"In order to facilitate potential new sales of stands in Brackenridge it has been agreed in principle, (subject to periodic review) by the Developer, after due consultation with ourselves to introduce the following with immediate effect:
1. A Moratorium on Penalty Levies will be granted to all new individual buyers of stands in Brackenridge for a period of 2 years from the date of the conclusion of the Sale Agreement.
2. This moratorium is to be granted to buyers who have a genuine intention of buying to build and is designed to facilitate the process of Architectural Planning, BARC and Council plan approvals, appointment of Building Contractors and arranging appropriate funding.
3. Should building not begin within the 2 year time frame the normal 5 time penalty levies will apply.
4. Should the property be resold the new buyer will only assume the remaining term of the two years still to run.
This moratorium will be introduced with immediate effect and is unrelated to the existing General Penalty Levy Moratorium currently in place which expires on the 28th of February 2010".
Fuller says that superb 1500 square metre stands at Brackenridge are the best bargains in Plettenberg Bay with some resale prices having dropped as low as R400 000. He says such entry level prices are ridiculously cheap in an estate that is probably Plett's best residential housing estate development and anyone seriously considering building a home in Plett should place Brackenridge at the top of their list.
For Further information or to purchase property at Brackenridge please contact Zelda Kruger on +27 (0)82 320 0664, email her at zeldak@everitt.co.za, or go to http://www.brackenridgeproperty.co.za/ or http://www.everitt-plett.co.za/
17 July 2009
New Electrical Regulations
The Government has promulgated the new Electrical Regulations 2009 which repeals the old 1992 regulations. The old Certificate of Compliance (COC) has been replaced with the Electrical Certificate of Compliance (ECC). The new regulations affect owners in the following way:
- Whereas the old COC was valid indefinitely as long as the owner had not made any electrical alterations to the premises, the new regulation provides that the new ECC will only be valid for a period of two years. Sellers will therefore have to provide Buyers with a new ECC where the certificate is older than two years.
- Transfer cannot be effected without a valid ECC.
- The new regulations became effective from 1 May 2009
26 June 2009
Snow in Plett
The drought has finally been broken with some very strong winds and driving rain over the past week. A fair amount of damage was done with trees uprooted and signs destroyed, but fortunately nothing too serious. Big seas have been running and waves have again come over the Bird Island sand spit separating the Keurbooms Estuary from the Bay. But the best news of all is that the Tsitsikammas and Outeniquas are covered in snow! The falls have far exceeded that of the previous three years and we are all waiting for the clouds to lift so that some spectacular pictures can be taken. There is simply nothing more beautiful than our beautiful Bay being surrounded by a ring of snow!
17 June 2009
Banks Clip Mortgage Originators' Wings
Banks have recently renegotiated commissions payable to mortgage originators and this has resulted in a substantial deduction in the future income potential for originators and Estate Agents who are the prime source of mortgage referral business to originators. Banks claim that the commissions were too high and have reduced their returns and increased their bad debts, but is this really so?
The mortgage originator's cost is paid up front when a bond is registered. Previously an originator could have expected to receive R24 000 against a R1 million bond. This being based upon the assumption that the originator's commission rate was 2,4%. Recently renegotiated commissions appear to have been reduced to 1,5%. If a bank charges its client a nominal interest rate of Prime (i.e. 11%) then the nominal interest cost of the originator's commission to the bank over 20 years is 0,22% for a 1,5% commission and would have been 0,36% for a 2,4% commission rate. The bank would therefore earn 11% minus 0,22% = 10,78% net). This is surely a small cost for any bank to acquire business and is much much lower than it would cost to implement their own sales infrastructure?
So why have originators' commission rates been reduced? Perhaps it is a result of the high life that has been exhibited by some leaders in the origination field who have perhaps naively flouted their wealth and extravagant lifestyle in the print and electronic media that has resulted in bankers and non-executive directors expressing displeasure at Board level, or perhaps the banks have begun to feel uncomfortable with the originators taking control of their client relationships, and cross selling other products such as insurance to their client base that has raised alarm bells!
While banks claim that the cost of commission to originators, which is paid upfront, has had a considerable impact on their income, it seems a little far fetched to justify how a R7 500 commission against a loan of R500 000 could have much of an affect on their total write offs or interest income.
Of course, banks don't only pay out costs for registering new bonds, they also charge clients substantial new mortgage documentation fees of at least R4500 per bond and also debit the client's account with a monthly administration fee; and sell householders insurance at inflated premiums, charged annually in advance (not monthly), and also often debited to the client's account a few months before expiry of the current premium. All these amounts are capitalised (unless the client pays additional cash into the bond) and earn substantial interest for banks. And while banks are accounting for the additional interest income each month, the capital outstanding is increasing - not reducing, and this is a major contributory factor to bad debts when the client cannot service the bond repayments, particularly in the first ten years when most of the payments go towards servicing interest, with very little capital having being repaid. At a later stage, when the outstanding capital is still high, the losses are accordingly also high and the additional income that has been earned in prior years is conveniently forgotten.
Then there are early settlement penalty fees. Clients need to give their banks 3 months notice of intention to settle their bond. If one does not, the bank will in all likelihood charge an early settlement penalty. On a R1 million bond, this penalty would amount to R25 500! This is of course far more than what the mortgage originator originally received as a commission. Is it possible that banks may have shrewdly negotiated their early settlement penalties into the new National Credit Act legislation to cover the cost of recouping mortgage origination commissions?
If banks are concerned about the costs of their up-front payments to originators, then it could be argued that there is a case for documentation fees and early settlement penalties to be off-set against the commission paid to the originator.
At the moment banks are not able to service direct mortgage applications with speed and do not have the infrastructure to compete with the service of mortgage originators. It will be interesting to see what happens when the economy improves. Will banks want to acquire origination companies or will they attempt to further strangle them hoping that their staff will join the banks?
The banks have long since abandoned personal relationships with their clients (motor vehicle finance on dealer floors and call centres are prime examples) and the originators, who provide a personal touch with face to face client interaction, may already be too powerful for banks to ignore if they want to be amongst the future mortgage growth market leaders.
The mortgage originator's cost is paid up front when a bond is registered. Previously an originator could have expected to receive R24 000 against a R1 million bond. This being based upon the assumption that the originator's commission rate was 2,4%. Recently renegotiated commissions appear to have been reduced to 1,5%. If a bank charges its client a nominal interest rate of Prime (i.e. 11%) then the nominal interest cost of the originator's commission to the bank over 20 years is 0,22% for a 1,5% commission and would have been 0,36% for a 2,4% commission rate. The bank would therefore earn 11% minus 0,22% = 10,78% net). This is surely a small cost for any bank to acquire business and is much much lower than it would cost to implement their own sales infrastructure?
So why have originators' commission rates been reduced? Perhaps it is a result of the high life that has been exhibited by some leaders in the origination field who have perhaps naively flouted their wealth and extravagant lifestyle in the print and electronic media that has resulted in bankers and non-executive directors expressing displeasure at Board level, or perhaps the banks have begun to feel uncomfortable with the originators taking control of their client relationships, and cross selling other products such as insurance to their client base that has raised alarm bells!
While banks claim that the cost of commission to originators, which is paid upfront, has had a considerable impact on their income, it seems a little far fetched to justify how a R7 500 commission against a loan of R500 000 could have much of an affect on their total write offs or interest income.
Of course, banks don't only pay out costs for registering new bonds, they also charge clients substantial new mortgage documentation fees of at least R4500 per bond and also debit the client's account with a monthly administration fee; and sell householders insurance at inflated premiums, charged annually in advance (not monthly), and also often debited to the client's account a few months before expiry of the current premium. All these amounts are capitalised (unless the client pays additional cash into the bond) and earn substantial interest for banks. And while banks are accounting for the additional interest income each month, the capital outstanding is increasing - not reducing, and this is a major contributory factor to bad debts when the client cannot service the bond repayments, particularly in the first ten years when most of the payments go towards servicing interest, with very little capital having being repaid. At a later stage, when the outstanding capital is still high, the losses are accordingly also high and the additional income that has been earned in prior years is conveniently forgotten.
Then there are early settlement penalty fees. Clients need to give their banks 3 months notice of intention to settle their bond. If one does not, the bank will in all likelihood charge an early settlement penalty. On a R1 million bond, this penalty would amount to R25 500! This is of course far more than what the mortgage originator originally received as a commission. Is it possible that banks may have shrewdly negotiated their early settlement penalties into the new National Credit Act legislation to cover the cost of recouping mortgage origination commissions?
If banks are concerned about the costs of their up-front payments to originators, then it could be argued that there is a case for documentation fees and early settlement penalties to be off-set against the commission paid to the originator.
At the moment banks are not able to service direct mortgage applications with speed and do not have the infrastructure to compete with the service of mortgage originators. It will be interesting to see what happens when the economy improves. Will banks want to acquire origination companies or will they attempt to further strangle them hoping that their staff will join the banks?
The banks have long since abandoned personal relationships with their clients (motor vehicle finance on dealer floors and call centres are prime examples) and the originators, who provide a personal touch with face to face client interaction, may already be too powerful for banks to ignore if they want to be amongst the future mortgage growth market leaders.
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