Buying your very first home is one of the most exciting times in one’s life. However, this experience can come with its own unique challenges if you are not adequately prepared.
In most cases, individuals will need to secure a home loan to purchase a property. This process can seem a little daunting, especially to those who have never applied for one before.
To help you get home buying ready, we have compiled all of the information you need to know before securing your very first home loan.
What Is A Home Loan
Simply put, a home loan is a loan granted by a home loan provider or lender (like a bank). The property you are purchasing is used as a form of security/collateral in case you are unable to meet your monthly repayments.
From the time that you secure and register a bond, the lender will hold on to the property’s title deed, until the home loan paid back in full.
How Do Home Loans Work?
A loan repayment is dependent on two factors. One being the total amount borrowed and the second is the amount of time you take to pay it off. Most commonly, you will be required to pay back the loan (with interest) over a set period, generally 10, 20 or 30 years.
The interest on your loan will be set according to the current prime interest rate, which is defined by theSouth African Reserve Bank (SARB). As of July 2019, the SA Prime Lending Rate was set at 10% pa, decreasing from a previous 10.25%.
Initially, your repayments will go towards paying off your interest. Eventually, they will go towards paying the actual loan amount.
Example: For a loan of R1m, taken over 20 years at an interest rate of 10%, you can expect to pay approximately R 9,650.22 monthly (without a deposit). Please note: there are other costs involved in purchasing a home, such as; initiation fee, transfer costs, bond registration and more. It is essential to thoroughly familiarise yourself with all of the related expenses so that you can adequately plan and budget.
Different Types of Home Loan
Variable home loan: The prime loan rate determines the interest rate for a variable home loan. This means that if the base rate decreases, your repayments will also decrease. However, it can also increase, which means that you could end up paying more.
Capped-rate home loan: With a stricter criterion, which is typically harder to meet – a capped-rate home loan prevents the interest on a loan to rise above a specific rate. The borrower will also benefit from any decrease in interest rate but is not affected by increases.
First-time buyers home loan: This type of home loan affords the borrowed the opportunity to invest in a home without having to pay a deposit. While it is not unheard of for banks to lend up to 100% of the purchase price, the homebuyer will have to meet the following criteria. 1. A pristine credit score 2. Flawless repayment history 3. Stable income 4. A guarantor on the home loan (someone who already owns a property that will be legally responsible if repayments can’t be met.)
Fixed-rate home loan: This loan offers homebuyers a fixed interest rate for a certain amount of time (typically 1 – 5 years). This means that you are protected against the increase in the interest rate for the set period. However, you will not benefit from any decreases, and the standard interest rate will apply after the fixed-rate term has ended.
Reducing home loan: With this type of loan, the interest rate will decrease slightly every six months for a preset period. When the interest rate drops, the gradual decrease would still apply to the loan.
Qualifying For A Home Loan
As a first time home buyer, you should know that there are a few factors a loan provider will take into consideration.
- Employment stability and income
- Other additional income
- Credit history and Credit score
- Size of deposit
Your credit score is one of the essential parts of qualifying for a home loan. If your credit score is too low, you are viewed as a high-risk candidate, making it unlikely to secure a loan successfully.
Your score is calculated based on your credit report. A credit bureau will take your debt, the way you pay your bills and how you compare to other consumers into consideration.
Your credit score is negatively affected by:
- Missed or late payments.
- A large amount of debt.
- Being blacklisted or a negative court judgement.
Reducing Your Interest Rate
Did you know that you have some influence over your interest rate? By applying some of the tips below, you can lower the interest rate on your home loan, which can save you a lot of money.
Bigger Deposit is Better: if you can, try and raise the largest deposit you can manage. With a large deposit, your monthly bond repayments will decrease, and you will be able to pay off your loan in a shorter amount of time. The bigger the deposit, the better your chances of securing a lower interest rate.
Clean Your Credit Score: Ranging between 0 – 999, your credit score indicates if you are a good candidate for a loan. Improve your credit score by paying all outstanding debt and ensuring that all your bills are paid timeously. Find out your credit score here.
Pay A Little Extra: Whenever you are financially able to do so, pay a little bit extra into your bond. As interest on a loan is continually calculated, additional payments will decrease your monthly payments and your interest rate.
Did you know that AMC Hunter INC is one of the top-performing conveyancers for most major banks? For this and more information on securing a home loan or conveyancing, please contact us on 031 309 5483 today.