A step-by-step guide to buying a property in Cape Town (South Africa) as a foreigner.
Did you know that you qualify for a home loan in a South African bank as an overseas buyer? I can imagine your thoughts are racing with questions such as: if I do qualify for a home loan, how much do I qualify for? What does the bank need from me to approve my loan? The bank will loan you 50% of the purchasing price and the remaining 50% must be paid in cash which can come from South Africa or any offshore-account. For example, if the value of the property you want to buy is USD 1 000 000, the bank will only loan you USD 500 000.
On the other hand, if you are currently working in South Africa with a work permit of 4 years minimum, it might be the best 4 years of your life in this country. Why? Because the bank is more likely to loan you more than 50% of the purchasing price depending on the system they use to assess your affordability, how exciting is that? It means the higher your loan is the lesser the percentage that you need to pay in cash.
Be ready with the following documents for your home loan approval:
- Copy of Certified Identity Document
- Copy of Certified Passport
- Marriage Certificate (If married in community of property)
- 3 Months Overseas Bank Statement
- 3 Months Payslips
- Overseas Proof of Residence
Where does an overseas buyer start searching for the property they want to invest in?
Your first stop should be the most beautiful city in South Africa, Cape Town. This city is amongst the most stunning cities in the world as it has a variety of amazing beaches, the astounding and breath-taking table mountain, the historical Robben-Island, dining places that are infused with different cultures, and beautiful vineyards. The city is South Africa’s top tourist attraction center.
After spotting that one property, the investment of my dreams, your first question is most likely to be; how do I buy this house? What does the law say? Let’s get into it.
To buy a house in South Africa you must enter into an agreement with the seller of the house and everything you and the seller agree on must be written on paper, this is called a sales agreement. The sales agreement must be signed by a notary public or the South African embassy or consulate from where you are staying. The property is subject to a voetstoots clause.
What is a voetstoots clause and why is it important?
A voetstoots clause is a clause on the sales agreement which states that the buyer buys the property as it stands and indemnifies the seller of any patent defects. In simple terms, it means once you have signed or the notary public has signed the sales agreement on your behalf you can only hold the seller accountable for defects that are invisible. For example, you can hold the seller accountable for a damaged foundation or a leaking roof but you cannot hold the seller accountable for peeling paint. What about the process of registering the house in my name, what do I need to know? How does it work? The process is called the conveyancing process.
What is the conveyancing process?
The conveyancing process is the process of registering the home in your name and it is called conveyancing because the attorneys that prepare the paperwork that enables you to be the owner of the home are called conveyancing attorneys. You might be wondering as to who are the conveyancing attorneys and what do they do exactly to help you.
The conveyancing team is made of the transfer attorney who is chosen by a seller, the bond attorney who is from the bank that gave you your home loan, and the bond cancellation attorney who is from the bank that gave the seller a home loan when the seller was a buyer. The bond cancellation attorney is responsible for cancelling the seller’s home loan. This team will assist you by drafting your title-deed, gather all the documents that are required to transfer ownership from the seller to you, and send them to the deeds office for processing. Approximately in 10 days’ time, you should raise that glass and make a toast because you will be calling yourself a Capetonian homeowner!
But wait a minute, who is liable to pay the attorneys for their service? Is there any other additional cost that I should worry about?
You are liable to pay the attorneys and there are additional costs that you should be aware of and I will break them down for you.
You are liable to pay a bond Initiation fee, deeds office fees, and the transfer duty tax. A bond initiation fee is a fee that is charged by the bank for processing your home loan application at a rate of about R6 050 (USD $387), deeds office fees are the fees charged by the office for transferring the ownership of the home from the seller’s name to your name and the fees are approximately R1 500 (USD $95). What about the transfer duty tax?
What is the transfer duty tax?
A transfer duty tax is the tax that is levied on the value of your property. The tax is collected by the South African Revenue Service (SARS) which is a body that was established to collect taxes. The tax rates differ for different property values. You do not have to pay the tax if your property value is R1 000 000 (USD $63901) and below or if you are purchasing from a tax-paying developer because the purchasing price already includes the tax. If you are not exempted from paying the tax, you must pay it within 6 months after the property has been registered in your name and if you don’t settle it, the tax grows at an interest rate of 10% per year.
Are there any other taxes that I should be aware of? Yes, your net-rental income will be taxed, and if along the way you decide to sell your house, your property's capital profit will be taxed by a capital gains tax and to make sure you do not forget or dodge the tax there is a tax called withholding tax in place. Do not get overwhelmed, I will go through each tax type with you.
How will my rental income be taxed if I am an overseas resident who is a homeowner in South Africa?
Your net-rental income will be taxed in South Africa and you need to register as a South African taxpayer. Your net-income is taxed in South Africa because the property is in South Africa and do not worry your income will not be taxed again when you transfer it to your overseas account because other countries are forbidden from taxing the same income by the Double Taxation Agreement that South Africa has with other countries. The tax rate ranges from 18% to 45% depending on how much your net income is.
What about the capital gains tax and the withholding tax, what are they?
A capital gains tax is the tax that is levied on your property’s capital profit if your property’s value is R2 000 000 (USD $126,000) or more. A capital profit is a price you purchased your property by less the price you are selling your property by. The tax rate is 10%. For example, if your capital profit is R500 000 (USD $319,535), SARS will collect 10% of it.
A withholding tax is a tax in place to ensure that you do not forget to pay the capital gains tax. If your property has a value of R2 000 000 (USD $126,000) or more and you decide to sell it as an individual seller, the buyer will retain 7.5% of the purchasing price, if you sell the property as a company the buyer will retain 10% of the purchasing price and if you sell the property as a trust the buyer will retain 15% of the purchasing price. The buyer must transfer the retained money to SARS within 40 days after the ownership transfer process.
To make the process of transferring your money to your overseas bank account easy after selling your house, ensure you have the following documents:
- Home Loan Documents
- Bank Statements that show the cash you paid for the deposit and the conveyancing process
- The Bill Statements (cost statements) you received from the conveyancers
- A copy of the Initial Sales Agreement (where you were the buyer of the property)
- A copy of the Current Sales Agreement (where you are the seller of the property)
- Foreign Bank Account Information
- Passport/Identity Document and Proof of Residence
Any questions, Let’s Talk.
