Why now is a good time for self-employed people to buy property.
Budget 2020 contained a number of proposals for helping small business owners to do business more easily, and bank mortgage loan approval rates are currently up on previous years. With a clean credit record and the correct paperwork in place, there’s a good chance that the banks will look favourably on self-employed applicants at present.
In his Budget speech in February, Finance Minister Tito Mboweni said: “Start-ups will ignite the economy. The tax system supports them in a number of ways, including the preferential small business tax regime, the VAT registration threshold and the turnover tax. We will review these to improve their effectiveness while reducing the scope for fraud and abuse.” An additional positive is the increase in the threshold for transfer duty on property from R900 000 to R1 million. This means you will only pay transfer duty on the portion of the price of the property over R1 million, so if the property you buy costs R1,5 million you will only pay transfer duty on R500 000.
Documents needed
The requirements for applying for a home loan through a mortgage originator or bank are slightly different to those for employees earning monthly salaries or wages.
Before approaching the institution, make sure you have the following documents ready:
- Financial statements for your business for the last two years.
- If your financial statements are more than six months old, the bank will need up-to-date signed management accounts.
- A cash-flow forecast for the following 12 months.
- A letter from your tax practitioner confirming your personal income.
- Personal and business bank statements for the past three months. Some banks ask for bank statements for six months.
- A statement of your personal assets and liabilities.
- Up to date confirmation from SARS that your business and personal tax affairs are in order.
- Up to date business or trust statutory documents from the Companies and Intellectual Property Commission (CIPCO).
- Certified copies of the identity documents of all the directors, members or trustees in the business.
Most of the paperwork is part of regular business and personal accounting, so providing the necessary documents should not require too much additional work on your part.
Other requirements
As for any home loan applicant, self-employed applicants need to ensure that their financial affairs are in order and that their credit ratings meet credit providers’ requirements.
Understandably, banks need to be sure applicants’ income is regular and sound, and they need to protect themselves as far as possible, particularly considering the size of loan you will be applying for.
It’s business
The requirements for applying for a mortgage loan if you are self-employed are more onerous than for employees with a fixed income. This is why self-employed applicants often approach banks ‘cap in hand’ - they think the bank would be doing them a favour by approving their application.
However, this attitude is counter-productive - it’s important to view yourself and the bank as equal partners in any transaction that takes place. Entrepreneurs - like banks - are (calculated) risk takers. Leaving a steady-paying job to start your own business is a risk and often requires a substantial amount of money. If your product or service has never been on the market before, you also put your reputation at risk.
In addition, there are risks involved in hiring employees, marketing strategies, and even customer service. If you are in a position to consider buying property, you are almost certainly on the road to making a success of your business, and should have the confidence to negotiate with the bank with the conviction that you are a desirable customer who should be treated with due deference.
On the other hand, it would be a mistake to approach the bank with an attitude of entitlement - there is a big difference between confidence and arrogance.
The best approach is to keep in mind that you are a businessperson approaching another business with a proposition that will benefit both. After all, the bank’s business is to lend money to creditworthy customers like you.