How do I finance a property I technically own?

Q: My father bought a property some years ago with the title deed in my name. He receives the rental income from this property and provides the necessary taxable amount to pay to Sars [South African Revenue Service]. I’ve been saving over the past couple years and have enough saved – R100,000 – for a decent deposit. My father has suggested that I could take out a home loan for the remainder of the amount and ‘purchase’ the property from him at the current fair market value of R500 000. The property is already tenanted so I think this is a good deal. 

However, when I contacted Investec, they informed me that it wouldn’t be able to provide me with a home loan as it deposits the loan amount directly in the owner’s account. Since I am already technically the owner of the property as per the title deed, they cannot deposit the money into my account.

Is there any alternate financial debt product similar to a home loan that would fit my financial needs in terms of borrowing around R400,000 at around home loan interest rates so I can purchase the property in cash from my father and then pay off the loan? I have sufficient monthly income currently and think I can pay it off in under ten years.

A: Assuming there is no bond owing on the house, and that according to the title deed you are the 100% owner of the property, you should be able to use the property as an asset in your name to take out a secured loan, which in the case of a property is a bond.

Essentially, what you are doing is taking out a loan against the equity in the house, where you give up the property as collateral so that if you default on the repayments the financing facility can retrieve what is owed to them through the asset (the property).

Since the property is in your name, the secured loan or bond would need to be registered in your name, and therefore paid to you. You would then be able to enter into an agreement with your father whereby you ‘purchase’ the property from him.

Bear in mind that even though the asset is yours, the loan would be in your name and you would still need to meet the loan servicing requirements.

The bank or financing facility you choose would need to do a credit check and analyse your income and expenditure to see if you can meet the repayment terms. It is not necessary to use your current bank for your home loan. Most banks in South Africa have bond departments and it is worthwhile shopping around for a good deal.

You may also want to consider using a bond originator. Bond originators submit home loan applications on your behalf, and often have a better chance of loan approval and better interest rates.

In understanding how secured loans work, consider the following:

About secured loans

A secured loan is one that requires the borrower to offer the creditor an asset, such as a car or property, as collateral until the loan has been paid off. After the loan is settled, the borrower reclaims full possession of the asset. If the borrower fails to repay the loan in full, the creditor can take possession of the asset and may sell it to regain the money borrowed.

Are secured loans legal?

Yes, they are completely legal. Much like any other kind of loan, the lender or financial institution takes a calculated risk in lending money. If the money isn’t paid back and there is no insurance on the loan, the financial institution may begin the debt collection or repossession process. Many financial institutions use either internal debt collecting personnel or third-party debt collection facilities.

Advantages of secured loans

Since the lender can take possession of the specified asset if you default on payments, their risk in lending you the money is lower.

This means you can often borrow more money with a secured loan than with other types. You are also generally given a longer repayment period.

Home loans are a form of secured loan where you borrow money against your home. Note that the lender doesn’t necessarily take physical possession of the asset while you’re repaying the loan.

Disadvantages of secured loans

Secured loans require the borrower to potentially hand over a very valuable asset to the lender – meaning that if the borrower fails to repay the loan the lender acquires that asset.

With regard to other financial vehicles available to you, it is possible to obtain a personal loan to the value of R150 000 to R250 000. In your case, this amount would not be sufficient to make up the outstanding amount needed to purchase the house. Such loans generally have a higher interest rate than home loans as they are considered unsecured loans.

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