Homeowners and homebuyers can obtain home loans from various lenders in South Africa. And most lenders offer borrowers a wide range in home loan options. The leading banks usually offer the following types of loan:
Variable Rate Home Loan
In South Africa, when people apply for home loans, they generally expect to get a variable rat home loan.
With a variable rate loan, the interest rate is linked to the base home loan rate, which can vary up or down, depending on the prevailing market conditions. If the base home loan rate decreases by one percent, so will your home loan interest rate. Of course, if the base home loan rate increases by one percent, so does your home loan interest rate.
Fixed Rate Home Loan
By definition, a fixed rate home loan is a home loan for which the interest rate is fixed for the duration of the loan. This makes it easier for borrowers to predict their future home loan repayments.
Home buyers could also have the advantage of paying a lower interest rate than the base home loan rate, should interest rates suddenly increase. So, while other homeowners, with variable rate home loans, are struggling with increased home loan repayments, homeowners with fixed rate home loans can simply continue paying the monthly repayment they are used to.
Lenders obviously risk losing out on profits, if they grant fixed rate home loans. So, South African lenders have changed the definition of a fixed rate home loan to suit their needs.
With a fixed rate home loan in South Africa, the home loan interest rate gets fixed for a specified period. This period is generally only between one and two years - not for the whole of the home loan term.
You will also be paying a premium for having your home loan interest rate fixed for this relatively short period. The interest rates that apply to fixed rate home loans are typically higher than the base home loan interest rate.
Also, if interest rates should suddenly fall, a fixed rate home loan means that the borrower actually loses out on the interest rate savings they could have enjoyed with a variable rate home loan.
Capped Rate Home Loan
A capped rate home loan allows borrowers to benefit from decreases in the base home loan interest rate, but has a capped rate (a maximum interest rate) built in, so they will never pay more than the capped rate.
That does sound like a great home loan arrangement, doesn't it? There seems to be only positives to this kind of home loan, with very little downside. But lets look at capped rate home loans a little closer:
A capped rate home loan comes at a price, of course. The payable interest rate may be a little higher than the interest rate that would be payable on a variable rate home loan. Also, the "cap' on a capped rate home loan is typically a little higher than you would like, at a typical 10% above the base home loan rate at the start of the home loan term.
Capped rate home loans are not always available from lenders in South Africa, and when they are available, the qualifying criteria are generally more stringent than would apply to a variable rate home loan application.
Reducing Home Loan or Step Down Home Loan
A reducing home loan, or step down home loan, is a home loan where the interest rate is guaranteed to decrease by a set percentage (such as 0.25%) in regular intervals (usually every six months) for the duration of the home loan term (usually less than 5 years). This guaranteed reduction in home loan interest rate applies regardless of whether the base home loan interest rate rises or falls.
So, a reducing home loan, or step down loan, can (for example) start off with an interest rate 2% above the base home loan interest rate at the beginning of the term, while ending up 3% below that rate at the end of the home loan term. Sounds sweet, doesn't it?
But borrowers have to remember that the outstanding home loan amount is big at the start of the home loan term, when the interest rate will also be at its highest. This means that a whole lot of interest gets added to the capital amount, at the start of the home loan term.
First Time Home Loan
In South Africa, the first time home loan is becoming increasingly popular. A first time home loan allows first time homebuyers to lend more than 100% of the purchase price of a property.
First time homebuyers are often strapped for cash. Scraping together the cash amount for paying the deposit, the registration fees and transfer costs on a new home can be a stumbling block for these first time home buyers. The first time home loan allows the registration fees and transfer costs to be included in the purchase price of the home.
First time home buyers are also not required to pay a deposit on the new home, which makes the first time home loan the easiest way to enter into the South African property market, and buying your first home.
The downside to the first time home loan is that it will take some time for the property to appreciate in value, to match the outstanding home loan amount. So, if first time home buyers get into financial trouble early in the home loan term, the lender may not be able to recoup the whole of the home loan amount, even if the house gets sold at auction.
First time homebuyers can therefore end up losing their lovely new home, while still having to repay a big chunk of their old home loan!
Home Loan Types
Lenders are in the business of granting home loans with the aim at making a profit in the process. No matter how kind and helpful the lender seems when you apply for a home loan, it is all about the money - and it should be all about the money for you too!
Every home loan type has an up side AND a downside. Lenders are quick to adapt home loan types in their favour, if it seems to have too much up side for borrowers. So, think through your home loan options. And try to choose the best home loan type for your specific circumstances.
The choice is yours!
