Buying a home is often the single biggest investment most people make. The largest proportion of home buyers seek a mortgage bond. As a result it is essential for buyers to ensure they are fully prepared for making a bond application.

The better prepared, the better the chance of getting the application approved. Rhys Dyer, Chief Operating Officer, South Africa’s leading bond originator, answers ten questions for new homebuyers to consider:

How much can I afford to spend on a home?
Before you look for a home it is important to know exactly how much money you can borrow and, most importantly, what monthly repayments you can afford. Affordability should be used as the main factor in deciding the loan amount to apply for. Banks will generally be comfortable should you be able to prove that you have sufficient disposable income after tax and all your monthly expenses to meet the monthly home loan repayment. If the repayment on the property you are looking to buy requires you to cut your monthly expenses to unrealistic levels, your loan will likely not be approved. Your bond originator will be able to help you in calculating and determining what amount you should consider.

Do I qualify for all the criteria that banks consider before awarding a loan?
Ensure that all your paperwork is ready for submission. Employment history is very important as it reflects a pattern of stability and income. For most lenders a consistent income stream is a key criterion when working out how much one can borrow. Lenders will also want to look at your credit history, so that they can see a pattern of borrowing and repayment as well as how you have managed you bank accounts and other credit facilities.

Why should I consider a bond originator? – www.mortgagepluscc.co.za
Bond originators specialise in shopping around with multiple banks to give you the best chance of getting your deal approved on the most beneficial terms. Banks all have very different criteria for assessing credit and in how they price loans, so the terms you obtain from one bank may be very different from another bank. The bond originator will work with you to ensure a home loan best suited to your individual needs.

Will I benefit from being prequalified for a home loan?
When looking for a new home it is strongly advisable that you are pre-qualified to give you a good sense as to the value of the property that you will be able to purchase. The pre-qualification process can also pick up credit issues on your record that would need to be fixed before you can formally apply to a bank. The pre-qualification process not only streamlines the home buying process, but also ensures the buyer is able to negotiate from a position of strength. Ask your estate agent or your bond originator to assist you with the pre-qualification process.

In addition to the monthly repayments, can I afford the additional costs?
Make sure you are aware of all the costs involved in buying a home. In addition to arranging a home loan and potentially putting down a deposit there are a number of other costs involved including legal costs, transfer duty, bond registration fees, and bank charges. These fees can stack up quickly and they have to be paid in order to complete the process. Over and above these ensure you have taken into account all the costs of home ownership including your monthly rates, levies and costs of insuring your home.

How can I get the best interest rate?
The lower the bank’s risk in lending funds to a consumer, the better the rate it will be able to offer. In calculating the risk, factors such as the loan-to-value ratio (the amount of deposit you are willing to put down to offset against the purchase price thus reducing the required loan amount), the size of the loan, as well as the repayment-to-income ratio (the ratio between the bond re-payment and the buyer’s income) are considered. Currently the size of the deposit is a key factor driving the rate at which banks are prepared to do business. The size of the bond for which you apply, your credit history and the investment value of the property you intend buying are some of the factors that may affect the rate you will be offered.

Consider fixed interest rate options
With interest rates currently at 35 year lows, one may want to give consideration to fixing the interest rate on your home loan when you apply for a bond. Lenders will often set a fixed rate bond at a slightly higher level than a variable rate bond; however, if you are working to a tight monthly budget, a fixed rate option removes risk and might be a prudent decision.

Can I afford to put down a deposit?
Besides improving your chances of getting your home loan approved, a deposit will result in a more favourable bond rate which will save you in interest over the term of the loan. As a home loan is paid back over a long period, generally between 20 and 25 years, even a small deduction in the interest rate on your bond, can save you thousands in interest payments over time. 100% loans are available, but the credit criteria imposed on 100% loans are very restrictive, and our advice would be to put down as large a deposit as you possibly can to ensure the best chance of home loan approval.

Consider the location of the property
The old adage of location, location, location still rings true for most South African homebuyers. Buying in the right area now can reap dividends in the long term when you choose to sell the property. It is important to get some idea of what the area you are looking to buy in may look like ten years down the line, as the demographics of an area can change relatively quickly.

Be Transparent
Always be completely transparent with your lender or bond originator. If you do not provide all the relevant information, likelihood is that the bank will pick it up and decline your loan. “Full disclosure” should be your mantra. Work with your estate agent and chosen bond originator to ensure that the property you are looking for is one that you can afford.

Please contact us if you require any further information or would like to apply for finance:

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011.327.4489 / 0861 1111 93

morne@mortgagepluscc.co.za

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Advice to Bond Applicants – take account of future rate increases

Advice to today’s bond applicants: take account of the inevitable future rates increases – or you could suffer.

With the interest rates at their lowest levels for some 30 years (the nearest we have recently come to the current levels was in April 2005 when the rate was 10,5%), home buying looks very attractive – and, says Rawson Properties MD, Tony Clarke, his group is witnessing a much stronger demand and a renewed willingness to consider homeownership.

But, warns Clarke, there is a serious danger here: many buyers will assume that the current low rates will be maintained for a long time and, thinking this way, they may easily over-commit themselves on their bond payments, only to find that when rates do rise “as they inevitably will”, they are in trouble.

“If one thing in financial circles can be predicted with absolute certainty,” said Clarke, “it is that today’s very favourable rates will not last for ever.

“One has only to look at the interest rate’s recent performance to understand how regularly changes occur – since 1990 the rate has changed 63 times. Even more significantly, the average rate over that period was 16,4% – approximately 7% higher than the current rate.”

Two or three years from now, says Clarke, interest rates could easily be at 14 or 15% again.

“While it is true that financial cycles never follow exactly the same patterns as before, it is also true that they do occur.”

So – what advice does Clarke have for the eager buyer now making plans to become a homeowner?

“Assuming that he does qualify for a bond,” says Clarke, “our advice is to pitch the bond application as if the rate will soon be 13,5%, i.e. apply for a bond roughly 20% below the maximum value which the bondholder could now be given. The applicant can work this out with a good estate agent or mortgage originator - let him just make sure that, if and when rates rise, he will not have a problem.

“For example, supposing the bond applicant has a sound credit track record and is a steady salaried employee earning ±R40 000 per month, he might qualify for a bond of R1 million – but we would suggest that he applies for a bond of R800 000. If this means that he has to opt for a less prestigious area or a similar, less luxurious home, so be it. He can upgrade later.

“This is infinitely preferable to finding when rates rise that the higher payments are causing distress.”

Just how significant future interest rises could be, said Clarke, can be seen from the fact that at current rates a R800 000 bond would cost R7 546 monthly. If and when the rates do rise to 13,5%, said Clarke, this monthly payment would rise to R9 656 – an increase of over R2 000 per month.

Clarke also repeated advice given previously, that if at all possible while rates are low, the bondholder should pay above the stipulated monthly rate and thereby shorten the payoff period and build up a savings nest egg.

“Even a few extra hundred rand paid each month will shorten the payback period by years – and it will also reduce the time before an upgrade is possible.”

CONTACT US

Speak to a home loan consultant about financing your new property or reviewing your existing mortgage. We are able to assist in lowering your bond repayments and securing attorney discounts.

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Email: morne@mortgagepluscc.co.za

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