Home Loan in South Africa

Purchasing a home is an important step for all couples looking to start or grow their family. If you’re a first-time buyer then you’re probably feeling overwhelmed by the lingo and list of processes involved in buying a home but the truth is it isn’t as complicated as it seems. With a little bit of research and some good judgement you could be making one of the best investments of your life in no time. Owning a home means that you can look forward to a comfortable, rent-free retirement but there’s definitely more to it than just that.

Buying versus renting a home

We’ve heard many people say that buying a home is far superior to renting one but what’s the reasoning behind this sentiment? Well, if you own your home than you own the home and when you retire you won’t have to pay any rent. This means you’ll be able to use your retirement funds for living expenses and other things such as medical bills and holidays – taking a lot of pressure off of your shoulders. You can also sell your home and downsize to ensure you have a more comfortable retirement and this is generally what most people do in their golden years. This means you will still have a home to call your own, albeit a smaller one, and a little bit of extra money to live comfortably and buy some of the more expensive essentials. If the value of the home goes up you can use the resulting equity to purchase a bigger home and the home will be worth much more 30 years down the line than you paid for it. It may also be cheaper to buy a home than to rent one so, at the end of the day you'll be left with an asset at the same expense that renting would’ve had and, one that can be liquidated.

If you plan to immigrate or move anytime in the near future then it may be best to rent rather than buy because you may have trouble selling the home when the time comes, particularly in a down market when people are not really looking to buy. If you work and live in an area that has a greater demand for property than supply property prices are probably very high and it may be wiser to rent. There are quite a few excellent online “rent versus buying” calculator tools that will help you determine exactly which option is better for your specific income and circumstances.  If you don't calculate both the once-off and on-going costs associated with owning a home you may find yourself in a very bad financial position, so it’s advisable to do all your homework before committing to anything.

Find out what you can afford

You should always consider your income, or in the case of a married couple, your joint income before beginning your search for a home. The reason that this income is so crucial is that you need to figure out how much the bank or other loan institution will be willing to borrow you. This amount is determined by the banks by subtracting all your expenses, including credit card repayments and other loans from your total monthly income. They basically look at how much you earn versus how much you spend to determine whether they can take on the risk of lending you the money. You can use one of the many “affordability calculators” available online to determine the rough amount that you’ll qualify for. In addition to the actual amount you can afford to repay every month on the home loan, you need to take into consideration other expenses you will incur during the buying process. These include conveyancing costs, transfer fees and the deposit on the purchase price, among others which you should budget to be about 8% of the total value of the property or loan amount you qualify for. In addition, this is a good time to take into consideration the costs that you'll incur from the new home such as monthly municipal rates. You need to ensure that in addition to being able to afford your monthly home loan repayments that you can also afford these other expenses.

What’s important to consider from the beginning of your home buying journey is that in order to ensure you qualify for a home loan you should have saved enough to put down a deposit on the home. This is important because the bigger the deposit you put down the more likely you are to be able to negotiate and receive a good interest rate from the bank. By securing a lower interest rate you will be able to save a great deal of money over the term of your bond and this deposit also proves to the bank that you’re capable of saving and increase your chances of being approved for the loan because you will be seen as a lower risk individual. This deposit will also reduce the risk of you going into negative equity.

A 10% deposit is a good amount to aim for but you should note than anything above 10% has the potential to reduce the interest you incur on the home loan by a very significant amount. It is however, possible to get a home loan without putting down a deposit but, this shouldn’t be your goal because you will end up paying a lot more in the long run. Securing a 100% bond with a bank is not easy and you will definitely lose out due to the hefty interest rate you’ll be paying.

Most banks and third-party organisations offer what is known as a pre-approval or pre-qualification service that I recommend you take, particularly if you’re a fist time buyer. This pre-approval or pre-qualification will allow you to determine the price range you have to work with based on what they’re willing to lend you and will also speed up the eventual home-loan application process.

Once you have been pre-approved and know your price range you can then begin looking for your future home.

Choosing the right area

Most of us have a very good idea of which area we’re looking to buy in or at least a rough idea based on where we work or currently live.  One of the most important considerations is that of crime so if you have your heart set on a particular area it is important that you find out about the frequency and severity of crime in the area. It may seem counterintuitive but many exclusive neighbourhoods have much more severe and frequent crimes than middle to low class neighbourhoods. A trip to the local police station might help you in determining the type and frequency of crimes within your desired neighbourhood or area. Additionally, you should get hold of the local newspaper circulated around the area and read it on a weekly basis, not only to gauge the type of crime common in the area but also to become aware of resident complaints and other on-going issues. This ranges from repetitive cable theft, vandalism and burst sewage pipes to poor service delivery, uncovered manholes, pot holes and illegal dumping sites.

Additionally your home should obviously be close to your place of work as well as to that of your spouse. If you have children in school then it should be close to their current school or have another good school available nearby that the children will be able to transfer to. You should also make sure that the area you choose has a number of useful or desirable facilities nearby. These facilities include hospitals or clinics, shopping centres, restaurants, parks and gyms. Areas that are seeing new properties and developments sprouting are generally considered to be good areas for purchasing property because the value of the property will increase more over time as more people flock to the area because of these new developments. Areas that lack new developments and are worn down and collapsing should obviously be avoided because you’ll probably end up incurring a major loss should you try and sell.

Most banks and other loan institutions offer what is known as a property report. This property report will include a variety of crucial information regarding the area you wish to buy in, use this data as it may point out things that you’re completely unaware of.

Choosing a home

When purchasing a property you should consider one that not only suites the size of your current family but also leaves a little room for growth. This doesn’t mean that you should go for a very pricey or large property if you can’t really afford it. You want to avoid ending up in a sticky financial situation down the line so always calculate accurately and remain within your set price range. A good place to begin your property search is in the local newspapers and online, this will not only give you a clear picture of what’s going on in the property market but it will help you compare the prices of various properties so you can make a smart, informed decision. Contact more than one estate agent to ensure you have the broadest range of options presented to you.

Determining whether or not a property is a good investment starts before you even set eyes on the property because you’re looking into the area or neighbourhood first. It’s also important to note noise levels once you’re there to view the property. This noise can be a result of heavy traffic on the road leading to the property or an airport nearby. If the property is located in close proximity to informal settlements, garbage dumps or large factories you may find yourself living with harmful chemicals and pungent smells seeping through your windows. My advice is to look carefully at the home but pay particular attention to the environment as well.

Older homes usually offer larger gardens and more spacious rooms at an equal price to newer yet smaller homes but will obviously require upgrades and maintenance that will cost you both time and money. If you’re willing to pay for the upgrades and repairs needed to ensure you get a more spacious property then this is a great option. Note that you must take the overall condition of the home into consideration before you make an offer to the seller. If there are extensive maintenance and update requirements you should be able to negotiate to bring the asking price down to a reasonable amount.

Many newly constructed homes are simply ready-to-go and this is a more solid option for anyone looking for a modern home than doesn’t need much attention. You should view as many properties as possible to ensure that you make the best possible decision, so don't commit to anything too early on.

Traditional Home Loan Institutions

All the major banks in South Africa offer home loans and these include First National Bank, Standard Bank, Nedbank and Absa Bank. All banks apart from Nedbank offer home loans to people that do not bank with them and as mentioned before, it’s a great idea to apply to all the banks so that you not only increase your chances of getting your home loan approved but so that you can choose the home loan with the best rates. All banks have their own set of approval criteria and processes so while one may deny your application for a home loan another might approve it based on the same circumstances. As mentioned you should always make use of the free tools, resources and advice that these banks have to offer. A good place to start your research is by visiting their websites and reviewing the information they have available there. This will not only help you understand the process better but will help you prepare any questions you may have for the consultants.

It is important to note that is it not only banks that offer home loans. There are other lenders that do offer competitive rates and many time have far less stringent approval criteria. Try out all the different options available to you because you have nothing to lose.

Applying for the home loan

All four major banks in South Africa have specialised teams that can assist you from start to finish in your applying for a home loan. Once you’ve found the home you want to buy you can make an offer to the seller and then signing a purchase offer agreement. You will then need to complete your home loan application with the bank. This is a fairly simple process, particularly if you’ve been pre-approved. You will need to provide them with proof of you income in the form of a payslip as well as a 3-6 month statement. You will also need to bring your purchase offer agreement, proof of current address and valid identity document. These are just some examples of what will be required and depends entirely on your individual situation as well as the bank you’re applying to. Once the bank is satisfied that all the required documentation has been collected and verified an approval process will begin where the bank will send a property evaluator to do a property evaluation on the home you’ve made an offer on that basically ascertains that the property is worth what is being asked for it. Remember that the maximum loan term you can get is 30 years, some banks have a lower maximum than this and you should always choose the shortest loan repayment term you can comfortably afford. You can also use one of many third party organisations to apply for a home loan to all the major banks on your behalf and this service is free to you because they receive commission from the banks.

What to do if your home loan application is denied

You should definitely apply for a home loan with all the major banks whether on your own or via one of the third party organisations we’ve mentioned previously so that should one deny your application you may have better luck with another. Also you will have the opportunity to negotiate the interest with all of them and should obviously opt with the one that offers you the lowest interest. Nedbank does not consider people that are not banking with them for home loans, so you may have three out of four options if you don't bank with them. If your home loan application was denied you need to simply find out from the bank why it was denied and you are always entitled to a clear explanation so don't feel shy to make the enquiry. Many times the reason is because you are not earning enough either on your own or as a couple to satisfy the bank’s minimum income requirements. This is probably the most common reason people are denied home loans but can be rectified by either adding your spouse’s salary to the equation or by lowering the amount you’re applying for, this essentially means you will have to buy a cheaper property but a home is a home nonetheless. If you have many outstanding debts from retail outlets such as Woolworths and Edgars then this could be the reason for the denial because banks will consider you to be a high risk because the chances that you'll  not be able to make all these monthly payments is very high. To remedy this get rid of this high interest debt as soon as possible and then reapply. If this is not the case then the reason could be that you have not been employed at your current place of work for a period that suites the banks minimum requirements. If this is the reason for denial then you should ask the bank what is the minimum employment period they’re looking for and reapply once you’ve reach this. Additionally, you may have been denied because you do not have the deposit required available and making an effort to save for this deposit would be the solution. If something went wrong when the property was evaluated, you can look for another property and begin the process again. Once your home loan is approved the transfer will begin. This will take between 3-6 months from the date of approval.

Home loan repayment tips

Now that you own your home you need to ensure that you make, at least, the minimum monthly home loan repayments to avoid additional interest being charged as well as other penalty fees.  My advice is to begin increasing your monthly home loan repayments from the onset of the loan. This is even more critical if you didn’t pay a deposit on the home because inevitably you’re paying a lot more interest because of this. This will help you save a massive sum of money because home loans work on compound interest, meaning that the further you are into your home loan term, the more interest you’re being charged. If you can’t afford to increase your monthly repayments from early on, begin as soon as possible but be aware that the longer you wait the less saving potential you have.

If you have savings it may be a good idea to put this towards your bond but only under the condition that you have no other debts that are sitting at higher interest rates than your bond. Credit card debt, vehicle financing loans and retail debt usually falls into this category. If you have such debts, then it will be worth your while to use any savings to pay off these high interest debts first while making your minimum payments towards your bond. The reason that it is a good idea to put your savings towards your bond if you don't have other debts is because the interest you are paying for the home loan will be much higher than the interest you’re earning from a savings account.

Another great way to save on your bond is to pay a portion of your annual bonus or any increase from work towards the bond. This may not be as effective as paying more than the minimum on a monthly basis but it will go a long way in helping you reduce the total interest you pay over the term of the home loan. If interest rates go down, call the bank or lender to ask that the minimum instalment remains the same or just continue to pay the previous amount.

If you cannot afford to make the minimum payments on your home loan than you must go to the bank or lender and inform them of your situation. All these institutions have dedicated teams that will be able to assist you to find a solution to the problem so don't avoid informing them of it. This may be to restructure you bond, increase the term of the home loan to reduce the minimum monthly instalment as well as other options that will depend on your individual circumstances and history.

A healthy budget goes hand-in-hand with being a home owner so draw one up and try to stick to it every month or, even better, use less than you’ve budgeted for and put the rest towards your bond, retirement account or other savings accounts.

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