Preparations are underway as South Africa is slowly emerging from the hard lockdown and while most of us are still determining the financial consequences of it all, one thing is certain – we need to be financially prepared for that “rainy day”. It can (and it will) sneak up on us at any time! Yes, we have learned a lot about ourselves, our relationships and our self-discipline, but the most important lesson that we should take from the lockdown, is that our financial arrangements are of utmost importance when it comes to the survival of any crisis.
The COVID-19 outbreak certainly had a devastating effect on our economy, but some experts are of the opinion that we are now entering a phase that offers many new opportunities, particularly if you are a first-time property buyer or buying in the lower price categories. If you are in a position to do so, you should consider these opportunities:
FLISP housing subsidy
In an attempt to ease the current financial pressure, government has introduced the Finance Linked Individual Subsidy Programme (FLISP), which is a housing subsidy programme aimed at assisting first-time home buyers. If your application succeeds, the subsidy is paid to the bank or financial institution who granted you a home loan, thereby reducing the outstanding capital amount and subsequently reducing your monthly loan instalments, making it more affordable to purchase a property. Households earning a monthly income between R3 501 to R22 000, may qualify for the FLISP subsidy if they meet all the criteria. The subsidy amount will depend on the income of the applicant, but the affordability ceiling of a first-time buyer who qualifies for a Government FLISP subsidy has recently seen a substantial increase. This programme not only provides an opportunity to ensure a better financial future but it also makes property ownership a possibility for those who would otherwise remain entangled in the so-called “rental cycle”.
Recent cut in the repo rate
Speaking of rental cycles, the decision by the Reserve Bank to cut the repo rate by a further 100 basis points to 4.25%, bringing the bond rate to 7.75%, was deemed absolutely necessary for the survival of our economy and the property market. In effect, it provides a significant saving in the purchase of property and another opportunity for those looking to strengthen their property portfolio. Exactly how will this affect you, you might ask? Well, the prime interest rate, which is the interest rate used by the banks when loaning money to customers with a healthy credit score, is inextricably linked to the repo rate. A reduction in the repo rate will result in a reduction in the interest rate. This means that you will pay a lower interest rate on the amount of money that you owe to the bank, be that in the form of a mortgage, car finance, personal loans or credit cards. This rate cut will not only provide financial relief to those with debt and home loans, but may also provide an additional stimulus for buyers who are still not entirely sure of whether to take advantage of the favourable conditions in the buying market. Banks are more likely to be more lenient when approving bonds and your chance of receiving 100% finance also increased with the decrease of the repo rate.
Leaders in the industry are in accord that property is a resilient investment that is less volatile than the global stock markets, showing relative stability over longer periods and with the potential to generate long-term income and a measure of security. It therefore stands to reason that we should consider investing in the property market while it still favours the buyer.
Section 12J investments
Section 12J of the Income Tax Act, Act 58 of 1962, was introduced in 2009 by the South African Government to encourage South African taxpayers to invest in shares in local venture capital companies (“VCC”). After acquiring issued shares in a VCC, the investor receives a share certificate and a tax certificate, allowing the expenditure actually incurred by the investor in acquiring these shares to be deducted from the investor’s taxable income during the year of assessment in which the expenditure was incurred. Subject to certain conditions provided for in the Act, the investor may receive a 100% tax deduction of the value of their expenditure when investing in these shares.
This is once again another government-backed property ownership initiative and it is believed that this 100% tax deductible investment model stimulates economic growth for those who might not have been able to afford property investment. There are many of these investment options available in the market, but you must take cognisance of their requirements, such as the fact that a minimum investment period of five years is required to retain the tax deduction of the initial amount invested.
Investment opportunities and risks
All of the above listed investment opportunities have their own risks and requirements and we urge you to consult your financial advisor prior to making any decisions. Our list is also not exhaustive and it might be useful to do your own research to determine the investment that best suits your unique circumstances. Should you decide to seize one of the many opportunities in the property market, you are welcome to contact Faure & Faure Inc to find out how we can be of service to you. We remain your partner in law, even in these unprecedented times.
Article by Inge Johnson, Property Law Expert and Attorney at Faure & Faure Inc. For more information email firstname.lastname@example.org.