Property prices have shown good growth in the past year, but have now been outstripped by inflation, which is currently running at 7,4% a year and could go even higher if international oil prices keep rising and supply-line constraints continue.
This has already led to the Reserve Bank raising interest rates five times since November, taking the prime rate from 7% to 9% and increasing the monthly repayments on all sorts of credit, from car and personal loans to credit-card and store-card balances, as well as home loans. On top of that, most municipalities have just implemented their annual water and electricity tariff increases.
“As a result, most home buyers are going to have less of their take-home pay available to cover a monthly bond repayment – and very possibly less cash available to cover transaction costs such as bond registration, legal fees and transfer duty”, says Berry Everitt, CEO of the Chas Everitt International property group .
“However, it often takes time for consumers to adjust to the effects of rising inflation and interest rate increases – and especially for homebuyers to understand the new constraints on their budgets and come to the realisation that they may well have to scale down their expectations and set their sights on smaller or less expensive properties than they were initially planning to buy.”
This is now starting to happen, he says, but many prospective buyers are still expecting to qualify for a bigger home loan than they can actually now afford in terms of disposable income. This is why it is important for buyers to consult a reputable bond originator and obtain mortgage pre-qualification before they start viewing homes.
It is also why it is increasingly important for home sellers to try to ensure that those who make offers to purchase their properties actually have the means to do so – or risk wasting weeks of marketing time and possibly even missing out on an offer from someone who actually could afford the property.
Writing in the Property Signpost, Everitt says the best way for sellers to do this is to work only with experienced and reputable estate agents who understand the value of checking on both the creditworthiness and financial capabilities of prospective buyers before bringing them to view your home.
“Ideally, any buyer that you see should have been pre-qualified for a bond, and be able to show that they have the cash available to cover the transaction costs and any deposit required. If they don’t, and you accept an offer from them (maybe because it was the highest offer), it is possible that the transaction could fall through because they can’t qualify for a bond, or be delayed for many weeks while they get enough cash together to cover costs.
“And such delays will mean additional holding costs for you – extra bond and insurance repayments, utility costs and municipal rates. It could also prevent you from being able to complete the purchase of your own new home, especially if you were depending on the proceeds of your sale to pay a deposit.”
Alternatively, if it turns out that your buyer cannot qualify for a bond and the deal falls through, he notes, your agent will have to start marketing your home all over again, or perhaps try to re-open negotiations with other prospective buyers that you already turned down. “This is not a good position to be in, and it is a reminder that the highest offer is not necessarily the best offer.
“You can’t of course force anyone to go through the process of bond pre-qualification, but it’s definitely up to you whether to accept an offer to purchase your home from an unqualified buyer or not. In addition, you can make it a condition of the offer that the cash needed to cover the deposit and transaction costs must immediately be transferred to your attorney’s trust account.
“Meanwhile, we urge prospective buyers to embrace bond pre-qualification, especially in the current financial climate, as it will provide them with the opportunity to become fully informed about what they can comfortably afford and enable them to go house-hunting with more confidence.”
