Home loans, what are the options

Home loans, what are the options

After years of renting an apartment you have decided to purchase a house. You are earning a good income and you would like to inquire about a home loan. What various bonds are available and which should you choose?

When requesting a bond you should consider what you want and what the bank will grant you. Accessibility to money in your bond and a hundred percent loan are obtainable from your bank should you have the financial security to pay the bank back. South African banks offer various home loan options therefore contacting your bank will be the next step.

As there are different types of bond options they are formulated based on the interest rate. The following are different kinds of loan options available from your bank:

Variable rate home loan is dependant on what is called a repo rate which is the lending rate offered by the South African reserve bank to other banks. Should the rate increase or decreases it will effect your bond payments accordingly.

Should you find that you are prepared to pay a set amount of money towards your bond then a rate that is fixed will be more suitable. In this case rate increases does not affect you and the monthly payment you make to your financial institution is consistent. This means that you are unable to benefit from a declined rate.

Should you however feel that you require a bond that meets a variable rate and a fixed rate then choosing a bond that is capped will suite your needs. This means that you repay your home loan at a different amount and you benefit from paying a lower loan rate amount should the interest rate decrease. To apply for this type of bond you would have to meet certain requirements.

Another option to consider is a bond that reduces its rate within six to twelve months. The lower rate is not dependant on the repo rate. This application is similar to changing your bond by doing so you can benefit from a lower rate. It is considered to be an effective way to conserve money and shorten the time to pay off your bond.

In South Africa people are fortunate to apply for a bond to finance their home or business. Certain requirements and financial records are presented to the bank from which they will ascertain for which bond you will qualify and the amount they will provide you with a home loan or business loan.

In order to benefit from the best option you can find a home loan mortgage broker to assist you with a bond that suits your requirements. FindBond.co.za will provide you with information on bond application, home loans and debt management. By Adriana Levi

5 things you should know before applying for a home loan

5 things you should know before applying for a home loan

Banks are competing vigorously for bonds in a market where their lending has been restricted by recessionary fears and now being opened up. The banks have a lot of cash available to lend right now and are seeking to lend to individuals or campanies that are in good standing credit wise. The better your credit rating the better interest rate you will receive.

1. Your own bank will seldom give you the best home loan deal.
This trend has become more and more evident over the past year, as banks try to woo new clients from their competitors. Moreover, we’re seeing a sharp rise in instances where bonds are being declined by a client’s traditional bank and approved by another bank with which the client has no connection.

2. Your bargaining power ends the day your bond is registered.
If you’ve ever tried to get your bank to lower your bond rate, you’ll know what I mean. Make sure your bond originator shops around among the various lenders to secure the best possible rate concession. It’s too late to seek a better deal once your bond is registered and switching your bond from one lender to another is no longer viable.

3. You must give 3 months’ notice to cancel your bond.
When you sell your property, you should give the bank 90 days’ notice of your intention to cancel your bond. If you don’t, you’ll be charged a punitive cancellation penalty equal to 3 months’ interest. On a bond of R1million, this is like throwing R25 000 down the drain. The banks are inflexible on this cancellation penalty, and will no longer waive it, even if you place your next bond with the same bank.

4. Voluntarily increasing your monthly payment by a small amount will knock years off the term of your bond.
The miracle of compound interest! Play around with the Bond Calculator on my website and you’ll see that by repaying an extra R312 per month on a R1m bond, you’ll knock 5 years off the term of a 20 year bond and save yourself R433 160!

5. Make sure you’re getting the best insurance deal
Homeowners Comprehensive Insurance is compulsory if you have a bond. In the past, this cover was provided automatically by the bank (the mortgagee) and you were not allowed your own choice of insurer. Now you, the mortgagor, can shop around for the insurance cover that best suits your needs, and your pocket. Be aware, though, that should you choose an outside insurer, the bank may levy a monthly “admininstration fee” on your bond and this could negate the effect of a cheaper premium.

30 year home loan interest rate chart

30 year home loan interest rate chart

The home loan rate has changed dramatically over the last 30 years from a high of 22.75% in 1999 to it’s current low of 10%. Since the banks cracked down on their lending criteria last year, the mood has changed and the banks are again offering 100% home loans to qualifying applicants. The change is essentially in the percentage of the purchase price they are prepared to accept risk on while the qualifying criteria remain stringent.

This is a clear indication that we are moving out of the perceived recession and that the banks have faith in the future of property prices.

Salaried applicants with a clear credit record have never had it so good! Interest rates are at their lowest levels in 30 years and some analysts predict that the recent drop in the Purchasing Managers’ Index |(PMI) leaves the door open for another interest rate cut, in spite of the Reserve Bank’s earlier indications that rates should stay on hold. And although FNB’s latest house price index showed a further acceleration in house price growth from 10,1% to 11,9% in April, the current buyer’s market seems set to remain until at least the end of the year.

Self-employed applicants still find it difficult to secure bond approvals, but only if they’re not able to prove their income to the banks’ satisfaction. Ensure that your financial statements are up to date and choose a competent bond consultant to motivate your application properly, and you shouldn’t have a problem.

The miracle of compound interest! Play around with the Bond Calculator and you’ll see that by repaying an extra R312 per month on a R1m bond, you’ll knock 5 years off the term of a 20 year bond and save yourself R433 160!

Fixed rate bond

Fixed rate bond

Fixing the interest rate on your bond is something to consider for those who really need to be able to budget or for the risk averse. It is generally not a good idea to fix your bond rate even if one considers that the bond rate is bottoming out and we are likely to enter an increase cycle.

The reason is that in order to fix your bond you will need to pay around 4% above the current bond rate which could be fixed for a maximum of 10 years but more likely 3 to 5 years. It is very unlikely that the bond rate will increase by that amount in a short period of time.

The bond rate has only been above 14% for a little over 12 months in the last 10 years(see rates below)

When we think about, the banks are in the business to make money and any product they offer is intended to either make them money immediately or to retain you as a client. By fixing your bond rate the banks are achieving both of these goals, they are making a hefty 4% (granted it’s a calculated risk in times of uncertainty) on you for the peace of mind of being able to budget.

User the bond calculator to see what the effect on your interest payment will be over a 5 or 10 year period, also do the calculation of how much you could reduce your period over if ypou paid the additional amount into your bond over that period. It is quite incredible what it costs in the long term. If this does not sway you away from fixing your bond, then go ahead and see what period and at what rate your bank will fix your bond at.

The extra money you pay into your bond being the difference between your present rate and the premium for fixing is very likely to save you a whole lot of cash unless there is a total meltdown and interest rates rise at unprecedented intervals, so think very carefully before you take this leap.