All you need to know about home loans
What you will learn in this guide:
In this guide you will learn about the different types of home loans, factors that determine the interest you pay for your home loan, what you need to do to to qualify for a home loan and where you can apply for a home loan.
- What is a home loan?
- What are the different types of home loans?
- How are interest rates determined?
- Factors that affect your interest rates
- What do you need to apply for a home loan?
- How do you qualify for a home loan?
- Where can you go for a home loan?
- How long will it take for you to repay your loan?
- What’s included in your home loan payment?
- Should you pay off your home loan early?
- Additional home loan tips
Buying a house can be expensive and not many of us can afford to purchase it for cash. However, banks have made it easier to realise the dream of becoming a homeowner by means of home loans.
What is a home loan?
A home loan is a loan usually granted by a bank to help you purchase property – that is a house or a piece of land. This loan is sometimes referred to as a mortgage or a bond. The property you are purchasing is used as security. It helps creditors or the banks recover their funds when you are unable to make repayments. This means the lender will repossess the property and sell it to another willing buyer. Your title deed will be kept until the loan is fully paid.
Tip: Click here to see how much mortgage you can afford.
What are the different types of home loans?
First-time buyers home loan
This is suitable for people who are purchasing a home for the first time but do not have the required deposit. Banks will lend you 100% of the purchase price which will cover all the costs including transfer and registration costs.
Variable home loan
This type of loan has fluctuating interest rates. The interest rates are tied to the repo rate. If the repo rate increases, the interest on your home loan will also increase. If the repo rate decreases, the interest will decrease.
Fixed-rate home loan
The interest rates on this loan remain unchanged for a fixed period, even if the repo rate increases. This period can be months or years, depending on the lender. Once that period passes, the interest rates will fluctuate. However, you can also sign a new agreement for the rates to be fixed again. A fixed rate can be a disadvantage if the repo rate drops below your interest rate. The opposite is also true if the repo rate increases beyond your interest rate.
Capped-rate home loan
This interest for this home can fluctuate but it is not allowed to exceed a certain rate. When the repo rate increases, you will not be affected because your interest rates are capped. If the repo rate interest increases beyond the capped rate, you will only pay the capped rate. However, if the repo rate decreases, you will also pay less.
Reducing or step-down home loan
If you apply for a home loan with reducing interest, your interest will decrease every six months. This will happen even whether the repo rate increases or decreases. This kind of loan is popular among those who are approaching retirement.
How are interest rates determined?
Mortgage interest rates are based on the overall risk profile of the customer at the time of inception of the home loan. In other words, the borrowing risk that the bank carries is based on your risk profile at the time of approval of the home loan.
With all home loans, banks are required by law to hold regulatory capital based on your risk profile for the duration of the loan agreement (usually 20 years). The cost of this capital has become more demanding for the banks. As such, given the duration of loan agreements, it is possible that the circumstances of customers may fluctuate over time. With this in mind, it would not be practical for banks to adjust the interest rates, either positively or negatively, whenever the customer's risk profile or credit history improves or deteriorates. Requests are assessed on a case-by-case basis.
Factors that affect your interest rates
Credit score: Your credit score mirrors your ability to repay your debt. If it is too low, creditors will view you as a big risk. If it is high, you may qualify for lower interest rates, taking other factors into account.
Type of interest: If your interest is fixed, it will not be affected by the repo rate. If it is variable, it will be adjusted according to the repo rate. Fixed interest rates can be expensive especially if the repo rate is adjusted beyond what you are paying. However, it allows you to budget, because you pay the same amount every month.
Total loan amount: The bigger the amount that you’re taking, the bigger the risk. So creditors are likely to charge you higher interest rates. However, if your loan amount is lower, your interest rates are likely to be lower.
Home location: If the home that you are buying is closer to amenities such as shopping centres, good schools, fitness centres, and offices, that could add to the value of your home. This, in turn, leads to increased interest rates.
Loan term: Longer terms tend to attract higher interest rates. If you want lower or better interest rates opt for a shorter term.
Deposit or down payment: Back in the days you would need to pay up to a 30% down payment before lenders issued you with a home loan. However, things have changed. Some lenders offer 100% home loans. However, if you want to pay lower instalments, it is advisable that you pay an upfront deposit. This can also help you negotiate lower interest rates.
Tip: Get your free credit report by clicking here.
Moreover, if you pay a deposit you gain more trust from the lender as you are likely to consider defaulting on the loan because of the potential loss on your side. A deposit also shows that you want your property enough to invest in it.
In addition to that, your insurance premiums will be reduced. This is because you no longer pose a great risk to the lenders.
Being able to put down a deposit when you plan to buy a home is a big advantage because it makes the amount you are paying back (the principal amount) less, and therefore you pay less interest (actual amount).
Here are some ideas of what you can do to save towards a deposit:
- Identify the target amount required for your deposit, costs and additional expenses (savings goal).
- Have a detailed budget to see exactly where you are spending most of your money, and where there are opportunities to move some money around and save.
- Do not add more obligations unless you have enough money to pay the extra obligation with your existing financial commitments.
- If your finances allow for it, set up a debit order and pay a set amount monthly into a savings or investment account that has a notice period – that is if you will not be tempted to use the funds.
To support your savings initiative, take all disposable cash and put it in a savings account or make extra payments to your investment account.
What do you need to apply for a home loan?
The minimum document requirements are dependent on the applicant and the type of application that is submitted. However, the basic documentation would be:
- A fully completed application form
- Proof of income
- Proof of identity
- Bank statements and
- A signed offer to purchase if you are buying a home
Applying with a spouse or partner
Joint applications with multiple parties are accepted. Full details of all the parties applying will be required, including disclosure of all income and expenses for each party.
How do you qualify for a home loan?
You must be employed
The nature of your employment status – full time, part-time, self-employed, permanent, contractor, will play a role in determining whether you qualify for a home loan or not. This criteria may vary between our major banks as some are more cautious of contract-employed individuals and may request additional information or documentation from your employer to confirm your employment consistency.
Overall, permanently employed individuals are considered when they have exceeded their three-month probation period providing that there is a permanent employment contract in place and consistent income proved by their salary payslips.
Self-employed individuals require more documentation with regards to their companies. Their company must also be registered with the Companies and Intellectual Property Commission (CIPCO), and have been in trading for a minimum of two years. Audited financial statements for two years are a minimum requirement for self-employed applications.
Your debt-to-income ratio must be low
Debt-to-income ratio: If you have too much debt, it will be difficult for your home loan application to be approved. Your debt should preferably be less than 36% of your gross income for lenders to grant you a loan. If it is above that, you might have to pay higher interest rates or not receive the loan.
Pre-qualification allows for some peace of mind if you are looking to purchase. With various online bond calculators, you can get an indication of the amount of loan you could qualify for along with a provisional interest rate. Additional to this, online bond calculators can also assist with information relevant to the registration charges, transfer costs and attorney fees involved in taking out a new home loan.
Where can you go for a home loan?
All the four major banks and some bond originators can help you get a home loan.
Note that Capitec Bank can also help you apply for a home loan through SA Home Loans.
We at Justmoney can also help you shop around for the most competitive home loan interest rates. All you need to do is fill in this form.
How long will it take for you to repay your loan?
It is important to note that a home loan is a long-term transaction, entered into over a number of years. The repayment term for the loan is 20 to 30 years, but you can repay the loan before that. Some people take up to 10 years. Remember, the quicker you pay off your home loan, the less interest you’ll pay. However, a shorter repayment term will mean higher monthly repayments.
What’s included in your home loan payment?
There’s more to home repayments than just interest and the principal amount. There are other payments such as insurance, registration, bond initiation fees, and transfer costs.
- Principal balance: The principal balance is the amount borrowed before all the other costs of the loan were added. You will only start paying this amount in the last years of the loan because a large part of your monthly instalments goes towards paying the interest. Only a small amount will go to the principal.
- Insurance: Mortgage Protection Insurance is one of the costs of your home loan. This is to help you to pay off your home loan should something like death, disability, retrenchment, or terminal illness occur. This often becomes compulsory if your deposit is less than 20%.
- Registration fees: This is the amount that is charged by the bank to register your bond. It is paid to the conveyancer and it includes VAT.
- Bond initiation fees: This amount is paid once and covers the costs of processing the home loan application.
- Transfer fees: You will only pay this amount if the value of the property you are purchasing is greater than R900,0000. It is used to pay the attorneys who help the seller of the property transfer the ownership of the property to you.
Should you pay off your home loan early?
For most buying a home is probably the biggest financial decision they will make, and it comes with a long-term commitment that needs to be budgeted for and prioritised. It is everyone’s aspiration to own a home, but often the 20 to 30 year-home loan is a commitment that many would prefer to pay off rather sooner than later. There are many ways to pay off your home loan sooner, but all these require commitment, perseverance and discipline. If you are jointly responsible for the home loan with a spouse or partner, it is important that you both make this commitment, as you will both benefit.
Benefits of paying off a bond early:
- Saving a lot of interest that would have been paid over the full term of the mortgage loan
- Pre-payments into the home loan account become a form of saving which can be accessed at any time.
- Equity available in the mortgage can be used at a later stage for upgrades and renovations to the property.
- When applying for other loans, the bank looks favourably on customers who keep up to date with their loan commitments.
- When your home loan is paid off, you are in a better position to save for your other goals.
- Paying additional amounts into your home loan during the good times puts you into a better position when times become tougher.
Additional home loan tips
Create a budget that includes all your monthly expenses. Do not add more obligations unless you have enough money to pay the extra obligation with your existing financial commitments.
Save! Save! Save!
Keep some money aside every month to cater for emergencies. There are benefits to saving towards a deposit for your home. If you do not have savings that can go towards a deposit, you should start saving now and get into the habit of putting money away each month so that when it comes to buying your first house, you have a deposit.