In 2016, following the success and ease in purchasing my first property, I reckoned I could apply the same process with my second. What wasn’t apparent to me was that buying cash versus buying with a bank loan would be very different.
When you purchase with cash, the offer to purchase (OTP) is enforceable after the seller accepts your offer, provided you don’t need the cooling-off period of five days. When you buy using a bank loan, there are clauses in the OTP that need to be fulfilled; one of them is the suspensive clause.
In most OTPS, the suspensive clause outlines that the OTP becomes legally binding once there is a bank willing to offer you the loan required – in other words, the conditions of sale are qualified.
My first OTP was pretty easy; I had the money and didn’t have to raise any loans. On my second, unbeknown to me that it would become a legal document, I changed none of the sale Ts and Cs for my own benefit. When one of the banks did grant me a loan, they did it to their benefit. The loan was for R2 850 000 at a fair interest rate of 9.7% back in 2016, but over a 30-year period. These are not just numbers. I remember declining this offer in my conversation with the bank and the estate agent. I didn’t know much about finance back then, but I knew these numbers were off. At the end of the 30 years, my repayment to the bank would be R8 803 495. This is more than double the future value of the R2 850 000. My estate agent, desperate for the sale to go through, tried to convince me that it was a fair offer from the bank.
Most of us, when we are put in a situation that will benefit us, may bend the truth. I know men and women lie. However, the numbers will never lie to you. Change a couple of things in the grant offer, such as a 30-year to a 20-year loan, and the total repayment changes dramatically to R6 465 374 – that’s R2 million of another house. Haibo! Don’t discount the numbers.
Money is a big part of our lives, and if we do not understand the maths behind money, we will not be able to manage it properly.
Credit and loans are also a big part of how people finance their goals, but do we pay enough attention to the numbers in our credit agreements’ Ts and Cs?
Do you ask yourself critical questions, such as what the interest rate is, the multiplier, the loan term, the instalment required each month? If you are not familiar with these terms, here is an opportunity to brush up on your financial knowledge.
◆ Principal. This is the initial amount that you have agreed to borrow from the bank. This amount is deposited into your account by the bank, and this amount plus a bit extra (due to interest and other fees) will make up the total repayment amount that will have to be paid back to the bank within the agreed period.
◆ Interest rate. The interest rate, or the cost of borrowing the money, is calculated as an annual percentage rate, or APR. The interest rate is usually fixed and may be dependent on your credit score. If you have a higher credit score, you will be granted a lower rate. If you have a lower credit score, you will be given a higher rate.
◆ Multiplier. Instead of using interest rates or APRS, some banks may use multipliers to calculate the standard fee to be added to the principal amount. If the multiplier is 1.5 on a principal of R10 000, the total repayment amount will be R15 000.
◆ Loan term. Loan terms can vary, and the instalments will differ depending on the period. A R10 000 loan over three years will not have the same instalments as a five-year loan. You will pay 60 monthly instalments for a loan term of five years.
◆ Credit score. When applying for a loan, a credit risk assessment is done. This indicates how much risk the bank would be taking exposing their money to you if it were to grant you the loan. This rating is often expressed as a score by the credit bureaus. It can shape the interest rate you are offered and how much you can potentially be granted credit.
It is essential to know these terms to negotiate the best loan plan for yourself. Remember that a loan is an agreement between you and the bank, so the bank needs to have confidence that the plan agreed on is one you can commit to.
We now live in a technologically savvy world, so before you apply for a loan, use an online loan calculator to play around with figures and see what scenario seems most likely to work best for you. But you will not be able to do that if you do not understand the mathematics of money.
Nicolette Mashile is the co-host of the SABC1 talk show Daily Thetha, an actress on Generations and the founder of Financial Bunny, a financial literacy platform. She has recently written a book, What’s Your Move? A collection of ordinary financial lessons.
PERSONAL FINANCE