For many first-time buyers, turning the dream of owning a home into a reality starts with an informal evaluation of their budget and then searching online portals for the property they want.
But this is not correct.
In fact, searching for the dream home and organising viewings should only come after completing a few important steps – the first of which knowing you will secure a home loan.
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Many people believe that they will merely approach their own banks and be granted a home loan with the best interest rate if they have a good credit history and can afford to repay the home loan. But this is “simply not the case”, argues Rhys Dyer, chief executive of ooba Group.
“We continue to see differing pricing decisions and credit from the banks, regardless of whether the applicant is that bank’s client. It’s important to remember that each bank has different loan criteria and, in turn, is required to comply with the National Credit Act.”
These are the five things prospective homeowners must do before applying for, and accepting, a home loan, experts say:
1. Understand how interest rates work
The prime lending rate is the cost at which banks are willing to lend you money, explains Shaun Rademeyer, chief executive at MultiNET Home Loans. The repo rate has a direct impact on the prime lending rate, which is the repo rate plus the amount which the bank adds to ensure they make a profit on their loans.
“The lower the repo rate, the lower the prime interest rate.
“South Africa’s prime lending rate is currently at 8.25%."
A lower interest rate will obviously make it possible for more buyers to afford a bond.
With interest rates likely to keep rising over the next few years, Rademeyer says homeowners who haven’t looked over their bond commitments should do so.
“Now is the time to make sure you get the best interest rate or decide if you should fix your interest rate."
2. Compare interest rates
Purchasing a home is the biggest investment that most of us will make in our lifetime. Therefore, it is strongly advised that you remain objective and do your research, Dyer says.
“We’ve seen many buyers rushing into home loan financing out of sheer panic without comparing interest rates to make sure that they are getting the best possible deal.
“Different banks will offer you different interest rates. The bank’s interest rate on your home loan is linked to the prime interest rate set by the South African Reserve Bank (SARB) – either above or below prime, depending on your credit risk profile.”
This is where comparing home loans can be of great advantage.
He also urges that you weigh up a number of elements in choosing where to apply, rather than simply waiting for bond approval by your own bank.
“There are a host of factors to be considered, given all the options available to homeowners today. All of these can be carefully explained to you.”
3. Consider the repayment period
A home loan term is generally a choice of 20 or 30 years, Dyer says, explaining that a 30-year bond means lower monthly repayments on a higher interest rate while a 20-year bond means higher repayments on a lower interest rate.
“A 30-year bond costs more in the long-term but will leave you with more room for additional expenses each month. A bond originator can help you to weigh up what’s best based on your affordability.”
Rademeyer recommends that you opt for a shorter loan period.
“Longer loan periods, say 25 to 30 years, will cut down the monthly instalment amount, and shorter loan periods, say 10 to 15 years, will help reduce the overall interest payable.
“Buyers can see for themselves how the interest gets reduced drastically for loans with shorter tenures by using a home loan calculator.”
He says it is critical that, before you sign up for a loan, you choose the loan period carefully so that you do not end up paying higher interest against your loan.
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4. Make an informed decision about putting down a deposit or not
The uptick in 100% (zero-deposit) bonds being granted by the banks has played a major role in the sustained demand for home loans.
“Of the home loans approved through ooba Group in Q1 of 2022, 64% of applications were for buyers who required financing for the full purchase price – a 5% increase on Q1 for 2021.”
However, Dyer cautions that this does have some drawbacks so it’s “vital” that you work closely with bond originators to determine whether it’s the best option for you.
“Prior to applying, it is also important that you work with a bond originator to determine your credit score and affordability; weigh up the financial pros and cons of a 100% bond; and have a clear understanding of the criteria that different banks use when deciding whether to approve a zero-deposit bond. All of this information is freely available and easily accessible to potential home buyers.”
Explaining the difference between a 100% bond and a 105% bond, he says: “A 105% bond normally cover the costs of transfer and bond registration (usually 8% to 10% of the purchase price), and is generally targeted at first-time buyers and properties below R1.8 million.”
5: Decide between a fixed or variable interest rate
Rademeyer says buyers often wonder whether they should ask for the bond repayment to be linked to a fixed or a variable interest rate. Explaining the difference, he says a variable interest rate means that the rate at which the home loan is repaid will fluctuate as the repo rate changes.
“When you apply for a home loan, it is by default based on a variable interest rate. Only once your bond has registered, can you apply for a fixed interest rate and then there is a strict time limit attached before the offer lapses.”
Having a fixed interest rate means the interest rate on your home loan will not change over a specified period, usually from 12 to 60 months. Opting for a variable interest rate means the rate on your home loan will change each time the South African Reserve Bank raises or decreases the repo rate, Rademeyer says, adding that a fixed interest rate is usually higher, as it poses more of a risk to the bank.
“The fixed rate is usually set for a period of up to five years.”
Some banks, Dyer says, may offer you the option of a bond with a fixed interest rate when you apply. This helps to protect buyers from interest rate hikes.
“However, it also means that you will not benefit from monthly repayment savings should it go down.”
Extra tip: Get pre-qualified
This is critical Rademeyer says, noting that the determining factor “must always be affordability”.
“So look carefully at your financial situation, to see what you can afford and consider your financial commitments and the current market conditions...
“Pre-qualification will be an essential tool for buyers, with financial stability playing a critical role in successful applications. It helps buyers improve their chances of having an offer accepted, while providing the opportunity to perfect their financial profile for preferential mortgage rates.
“That could go a long way toward minimising the impact of rising interest rates in the years to come.”