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Durban - Plan Your Dream Home, written by Nick Oosthuizen and published by Crink, is a step-by-step guide to building, buying or renovating your home. Finance of course, is key. Here is a breakdown of the different sources of funds, as listed by Oosthuizen, that are available to the home builder.
Although there are many options of financing, mortgage bonds are by far the most common means of financing a home as they are well regulated, providing the best means of protection to you as the borrower as well as to the lender.
In this instance the property itself is used as security, meaning that you don’t have to carry the total risk burden yourself.
Although it depends much on the attitudes of the banks in your region, they try to make you sign for personal guarantees as well.
This is not necessarily fair, as the bank should ensure that the property provides enough security for its need for risk cover, writes Oosthuizen.
Always make a counter-offer by deleting that part of the loan offer.
Also be aware that the interest rates and loan terms and conditions vary among financing institutions.
It is worth your while to shop around.
Bond originators are in a good position to advise you on the differences between the banks and what would suit your situation best.
Access loans can be considered should you have a business and want to use your home loan account to serve as an excellent savings account for future taxes or the like.
Depositing money into your home loan account is a good investment, especially considering the saving on interest.
Various financial institutions offer access loans linked to your bond, allowing advances and re-advances to be made directly from your home loan account.
Bridging and short-term financing
Other options include overdraft facilities, extended credit and cash loans, which are more appropriate for bridging and short-term finance and which come at higher interest rates.
In these instances, guarantees are required from you personally or collateral security from another person who is prepared to stand surety for your repayments.
This would be appropriate if you required bridging cash flow until there was progress reimbursement by the mortgager or payment on the house you have sold.
With tighter credit controls by banks it will be difficult to source this option, as it is often not approved as a replacement for your cash contribution.
Try to avoid moneylenders who charge exorbitant interest rates for cash loans.
However, having done your homework during the concept phase, you should be able to plan your project in an affordable way and should not encounter an unforeseen need for bridging capital.
The problem is that if you don’t use the cash to bridge the project, you are going to have a shortfall at the end of it.
Housing subsidies are often provided to employees of insurance companies, other private corporations, local authorities and government.
These subsidies may be in many forms, such as access to low-interest home loans, part-repayment each month, cash contribution against the employee’s pension fund, and providing repayment guarantees.
Should you be in a position to receive such a housing subsidy benefit it is worth considering and using it, but just make sure of the extent to which such a benefit is classed as a perk, on which income tax will be payable.
In a number of countries governments provide a homeowner’s subsidy to first-time buyers to create an incentive to invest in fixed property. This is absolutely worthwhile investigating.
Loan repayments and interests
Mortgage bond home loan repayments are calculated over the loan term, which is in the region of 15 to 30 years.
The only difference between the short and long terms is the capital repayment – with a long loan term, the interest percentage remains the same, but the outstanding capital stays higher for longer because of lower capital repayment.
It is always one of the best investments to pay excess cash into your home loan account as it saves the interest on that repaid capital.
A safe policy is to negotiate a term that is as long as possible, but to repay the loan as quickly as possible.
Many people choose to link their bond repayments to other investment mechanisms such as shares in proven companies listed on the stock exchange, or endowment policies etc.
In this instance only the interest portion of your bond is paid to the bank and the balance is invested elsewhere, with a higher growth potential than the interest paid on the loan.
Over the full term of the loan the other investment will thus grow enough to cover the full capital amount, but most likely at a rate fast enough to repay the entire loan within a shorter period than the loan’s term. The result can be well worth it.
Interest rates are mostly subject to fluctuation.
The prime lending rate of the bank you are doing business with is normally linked to the repo rate of the country’s central bank.
The fluctuation hinges on the state of the economy and should be taken into account when determining your own affordability by taking, say, a 12-month view of the history of interest rates.
The banks are able to provide you with their prime lending rate history, details of which are normally available on their websites.
Their loan offer to you will also specify the interest rate in terms of their “prime rate”, so it is quite easy to obtain the history of your specific rate.
Also enquire about fixed interest rates, but weigh this option up very carefully as banks design their offerings in such a way that they do not take a risk. - The Mercury