Unless you are one of the fortunate few who can purchase a home for cash, you will need to apply for a home loan (also known as a Bond) to finance your purchase.
Mortgages
The majority of property buyers require a mortgage to purchase a home. The mortgage business is big and competitive, and mortgage types and rates can vary considerably from lending institution to lending institution. So, choose the mortgage option that suits you and your life style.
Your Credit Rating
Have you considered your credit rating lately? This is an important factor that can influence whether or not you get that loan approval from a mortgage lender. So check out your finances, and settle those hidden debts. The banks will assess your income, your ability to raise a deposit, make payments, and your employment record. If you have had bad credit, note that it can take months for your rating to improve.
The 30% Rule
Most South African lending institutions apply the "30% rule" when accessing your allowed bond amount. This means that your monthly bond repayment should not exceed 30% of your gross monthly income. Your partner or spouse's income is also taken into account provided that they co-sign the bond agreement.
The Deposit
The amount you have saved up as a deposit gets added to the bond amount to determine how much you can afford to spend on your new home.
Use the RealFact Bond Calculator to calculate the amount you can afford to loan towards buying a home.
If you need any assistance with your calculations or have any questions, please post your question here.
Getting Pre-Approved
You can also apply for a Pre-approval Certificate from your favourite bank. Your real estate agent would normally be more than happy to assist you in this.
A pre-approval certificate can give your offer the edge on other similar offers. Sellers take a gamble when accepting an offer subject to a bond. They have no idea if the buyer will actually qualify for an adequate bond. If an offer expires due to a rejected bond application, it will have cost the seller up to 2 weeks of lost marketing time.
A pre-approval certificate proves that you are a serious buyer with the means to purchase their property. The only obstacle to a bond approval now becomes the bank valuation of the property.
Appraisal and Valuation
The valuation is done to assure the bank that there is adequate value in the property to secure the bond. A bond can still be issued if a valuation found inadequate value, provided that the purchaser pays a deposit to make up the difference.
Interest Rates
You are usually offered a choice of interest rate options when applying for a bond. Except for the effective interest rate, you can also choose between a variable or fixed rate. A variable rate changes with the institution's prime lending rate. A fixed rate stays fixed for the agreed period, irrespective of changes in the prime lending rate. The fixed rate option will give you the peace of mind that your obligation is constant and predictable. The variable rate allows you to benefit from lower interest rates if the prime rate falls, but can become a drain on your cash flow if the prime lending rate rises.
Personal Applications
Most good real estate agents will gladly assist you in applying for a bond at the bank of your choice, or even all of them! You will need to supply your estate agent with the following documentation:
- Offer to purchase, signed by both parties
- Proof of income (usually a "pay slip")
- A copy of your identity document
- Three months' bank statements if you apply with a bank other than your current one
Companies, Trusts And CC Applications
The required documentation is a little different for buyers that are legal entities or buyers that are not South African residents. It is important that all the required documentation is supplied as soon as possible to avoid delays in the application and registration process.
Approved In Principle
The lending institutions will be able to advise us if the application has been approved in principle or declined.
If approved in principle, we will contact the seller to arrange for the institution's assessors to value the property. If the assessor is satisfied that the property provides adequate security for the loan, the loan will be formally granted. A letter of grant will be issued, confirming the salient details of the home loan.
The Cost Of Owning Your Home
The cost of owning a home is more than just a monthly payment. When drawing up a budget, the following should be included:
- Life insurance - Life cover is often required to secure the bond in the event of the bondholder's death. An existing policy can be ceded or a new policy can be arranged to cover the bond.
- Home insurance - all bonds require homeowner's insurance as a condition.
- Household content insurance - It's better to budget for insurance than replacing all your furniture and appliances.
- Rates, taxes, water and electricity
- Maintenance
- Moving costs
It may be wise to leave a safety margin in your budget, especially in times when the prime lending rate is at a low level. There is always a possibility that interest rates may rise.
