Collective property buying: Here’s what you need to know

Collective property buying is a new FNB home loan lending solution that enables up to 12 people to purchase property together.

FNB introduced this solution last month, to help make it affordable for South Africans to buy and invest in residential property by sharing monthly bond repayments with others.

“Collective property buying is for individuals or non-trading juristic entities, such as a trust of individuals who want to invest together. The offering does not extend to trading entities though,” says Mfundo Mabaso: Growth Head at FNB Secure Lending.

Mabaso explains that the scheme allows for up to 12 people. However, if you apply using the FNB App, the application is limited to eight people and includes applicants who are married in Community of Property (COP). Applicants of more than 12 people can apply using a customer-facing channel such as going to a bank branch and talking to a banking professional.

Once the application has been submitted, the bank will review each customer’s credit profile, including the nature of income, expenses and affordability.

He says these are assessed in conjunction with credit bureau profiles and the information on the account conducted with various creditors and banks.

“The solution allows for customers to elect and deposit funds directly into one transactional account. They can also run debit orders or request a stop order payment from their transactional accounts.”

Mabaso says there is no loan limit for the collective property buying product. The loan amount is based on what the applicants as a whole can afford.

Furthermore, FNB has splitbilling functionality, which allows multiple parties to pay on various dates at specified contributions. For example, if there are five applicants, each person is responsible for 20% of the total repayment amount.

It is important to note, however, that as with any home loan, customers remain jointly and severally liable. This means that if one owner cannot pay, all the other owners will be responsible for the payment of those who cannot pay.

“Since launching on 18 August 2021, the market sentiment for collective buying has been positive. Real estate professionals are excited about the prospect of this product, as it assists with affordability in the affordable housing market,” notes Mabaso.

He says real estate experts are positive that this will increase activity in higher-income segments. Apart from driving up first-time home buyer activity, real estate experts believe that this will spur on more investment-buying activity among likeminded people.

Mabaso says it is important to understand that collective property buying is different from a stokvel structure.

A property stokvel structure differs in that there could be multiple properties involved over a period of time, where one property has to be built and then occupation takes place in order of preference, administered by the stokvel. This often requires monthly contributions to place towards the stokvel. It may require cash to fulfil on the property purchases if there is no finance.

“The collective buying holds applicants jointly and severally liable over the individual property. This property occupation must be decided between the applicants,” says Mabaso.

Costs associated with buying property

Although interest rates are at historic lows, many people still cannot afford to buy property.

Lee Mhlongo, CEO of FNB Property Finance, says their records show that when a customer considers purchasing a property, they tend to forget the additional costs. These include registration costs, transfer duties and sometimes a deposit, presenting more barriers for an individual to afford the property.

“The advantages of collective property buying with friends and family mean that customers are now able to share the costs equally to make the purchase and the process affordable. Additionally, customers will enjoy reduced monthly repayments and personalised rates,” says Mhlongo.

Customers who fall within the ‘gap housing market’ and whose income is between R3,501 and R22,000, are still encouraged to consider Finance Linked Individual Subsidy Program (FLISP), a government home ownership assistance programme.

FLISP is intended for individuals whose income is not enough to qualify for a home loan, but exceeds the maximum limit applicable to access Government’s ‘free basic house’ subsidy scheme.

The benefit of a cash contribution from such a programme can significantly reduce the financial burden on households, according to Mhlongo.

 “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,” says Mhlongo.

Three factors banks use to assess loan applications

Meyer de Waal of MDW INC Attorneys says that for those struggling to obtain loans to buy property, collective buying is a good solution.

He explains that there are three main criteria to convince a bank to grant you a home loan.

1. Credit score

“Your credit score shows the bank your ability to pay back your credit arrangements and obligations.”

A lows credit score that shows regular non or late payments on your credit score report will result in the bank’s reluctance to grant you credit.

If your credit score is good and your debt-to-income ratio is not too high, the bank may consider your home loan application favourably, he says.

2. Affordability

Is your income stable and sufficient to pay back the monthly loan instalment?

De Waal explains that as a decision, a bank will use the 30% of income rule to determine the applicant’s affordability to repay the home loan. For example, at a home loan interest rate of 7% [the current prime lending rate] for a loan of R800,000, payable over 20 years, a buyer must earn R20,600 per month to qualify for the loan.

3. Loan-to-value (LTV)

Are you taking up a 100% home loan, or do you have a deposit to put down? What is the value of the property, compared to the loan for which you are applying?

As an example, if you apply for a 100% home loan, then your risk exposure to the bank will be higher. It’s likely that the bank may increase the prime interest rate and add one or two extra interest rate points to your home loan.

“The bigger your deposit, the better negotiation power you will have to secure a lower interest rate for your home loan. Collective buying therefore makes a lot of sense,” points out De Waal.

If up to 12 buyers can add their income, it can thus strengthen the home loan application based on affordability. Moreover, if these buyers pool their savings to put down a bigger deposit, they lower the home loan interest rate, he says.

Benefits of collective property buying

• More affordable monthly payments
• Can qualify for a larger home loan amount
• Can put down a bigger deposit as a collective
• Reduced maintenance and running costs, as well as shared financial risk.

FNB also provides adhoc benefits that include:

• No transfer duty cost for bonds below R1m

Access to a Will that caters for individual circumstances at no cost, which includes a safe-keeping service

Accidental Death Cover at no cost to the customer (only applicable to Entry Wallet, Entry Banking and Middle)

• Personalised interest rate plus main banked concession 0.25% if applicants bank with FNB.

Disadvantages of collective property buying

De Waal says that there are disadvantages to buying property collectively and advises people to select fellow joint owners very carefully.

Ideally, he says applicants should consult an attorney to help them understand the process of joint ownership.

De Waal says that such an agreement should address issues and questions including:

• What happens if one owner:
• wants to sell his or her portion? Will it be offered to the other co-owners first, after which it could be sold on the open market? Who determines the fair market value?
• dies, marries, divorces a spouse or becomes insolvent? Each of these incidents usually requires the transfer of the share of the property to a new person/owner. It could also mean that the bank may be required to release the owner from the operation of the mortgage loan. Therefore, the remaining owners may have to re-apply for the home loan to check if they are still able to repay the home loan every month.
• If the property is to be let or sold, how many votes are required to make a decision?
• Who occupies the property and will this person (if one or more of the co-owners) pay pro-rata rental to the other co-owners, and at what cost will such rental be calculated?
• Who will be responsible for repayment of rates, taxes, levies and maintenance of the property?

De Waal adds that collective property buying is an enabler to anyone who previously could not afford to purchase property.

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Edited by Gudrun Kaiser