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If you are formally employed and earn a regular salary, getting a home loan is not that difficult if you have a good credit record. However, until recently, people who work on contract as freelancers have not been able to get home loans if they did not earn a regular income.
But that is changing now with an emerging trend in home financing for irregular earners to buy a home through an instalment sale agreement, Renier Kriek, managing director at Sentinel Homes, says.
“It is not easy to get a home loan on your dream home if you are not employed full-time and earning a fixed salary. Freelancers, people working on commission or sourcing their income from gigs and many other independent earners often find themselves facing a brick wall when applying for a home loan from banks.”
However, he says, more people than ever are becoming self-employed in these fields and are seeking easier alternatives to the traditional home loan.
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Kriek says instalment sale agreements are steadily becoming popular not just among those who do not qualify for a bond but also among many who do not fit the salaried mould that the home loan model was specifically developed for.
Kriek says an instalment sale makes acquiring a home similar to buying a vehicle on instalment sale or hire purchase, where a company finances the purchase and the buyer repays the value of the property in monthly instalments.
Although the company holds the title deed, the buyer enjoys all the rights and responsibilities of ownership during the period of the contract. Once the purchase price is repaid in full, total ownership is transferred to the buyer, Kriek explains.
“On the surface, there is little difference between buying with a bond or via an instalment sale. The only practical difference is the procedure followed when the buyers do not pay their instalment, but even in that case, an instalment sale is to their advantage.”
Kriek says an instalment sale agreement offers several advantages to homeowners, such as improved affordability, an improved credit score, lower risk of default and legal protection.
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As a freelancer or a self-employed person’s income may vary from month to month, the bank will only consider a portion of their earnings. Therefore, Kriek says, even if they qualify for a home loan, they will likely have to settle for a cheaper property or fund any shortfall on the purchase price themselves.
“Through an instalment sale, up to 100% of their income is assessed. This gives the buyer more freedom to choose a property they really want.”
An instalment sale allows a buyer to acquire a valuable asset sooner and improve their credit score in the process.
Kriek says as the property’s value increases and your financial position grows over time, you may become a more attractive borrower and you do not risk being caught in a rent trap while the values of homes continue to increase.
“Many of our clients have been granted bonds on the basis of their instalment payment history and were able to settle our instalment agreement early from bond refinance. You can never get on the property ladder soon enough.”
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When you fall into arrears on your home loan, you face losing your property through a sheriff’s auction, having adverse judgements for debt against you and being block-listed for five years or more.
Kriek warns that this impedes your ability to acquire another property and obtain any credit and may even limit your employment opportunities.
“However, with an instalment sale agreement, you have more options, including negotiating your position and ultimately selling the property to pay off your debt. Even then, you retain a clean record and we have assisted clients that eventually recovered from such a position to buy another property.”
As with a home loan, the contract is governed by the very comprehensive National Credit Act, while the Alienation of Land Act also applies, ensuring the parties’ rights are fully protected. Instalment sales are also registered against the title deed of the property, Kriek says.
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As more people start to freelance or work in other independent fields with irregular income, owning a home through an instalment sale agreement promises a logical alternative to home loans.
“It is clear that an instalment sale agreement offers better advantages, more protection and greater flexibility for people who dream of owning a home without sacrificing their financial independence. The offering is available via mainstream intermediaries and people can ask their bond originator or estate agent about this currently lesser-known financing option.”
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