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How to Know What you Can Afford when Buying Real Estate
If you are considering buying a home the first thing that comes to mind is affordability. How do you know what you can afford?
Wouldn’t it be great if you could just write a cheque for the home of your dreams and to know that it is taken care of? Almost like buying a new set of golf clubs or a leather coat. Just write out a cheque. But unfortunately, very, very few (if any) people in today’s life can afford buying a home like this. In the real world, the way to go is a mortgage. Taking out a mortgage is a very big commitment and the following questions should be answered before making any decisions.
Firstly, you should ask yourself what your ability is to make a down payment. If a down payment is required, you should know how to go about getting the money and how much you will be able to give toward a down payment.
Secondly, ask yourself what your ability is to make monthly payments. Monthly payments on your mortgage are one of your most important monthly payments you will ever make. Not only can you lose your home if you don’t make these payments, but you can be blacklisted and never be approved for a home loan again.
Your financial future should be taken into consideration as well. You should know the stability of your earning power before making this kind of commitment. If you are not sure if you will have a job in the next six months because your company is retrenching left right and centre, you should probably not make such a huge financial commitment at this stage. But even if you are sure you will be able to make the payments every month, on time, you should still have a contingency plan. This is necessary for a worst-case scenario. Anything can happen and you might need the money for something else, so when taking out a home loan, make provision for the unforeseen and make sure that if something should happen that makes it impossible for you to make the monthly payment, you have some savings to cover your monthly payment.
Chances are slim that you will need this, but like insurance and medical aid, if you don’t have it, something will happen and if you do have it, you will hardly ever need it! Better safe than sorry.
Please contact us if you require any further information or would like to apply for finance:
Complete this short form online
011.327.4489 / 0861 1111 93
morne@mortgagepluscc.co.za
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• A mortgage is a loan that is secured on immovable property, normally your home, hence the term “home loan”.
• The mortgage is lent to you in a lump sum to pay for the property and is legally bound to the property by the attorneys who register your mortgage bond. You then have to pay back this mortgage over a given length of time.
• This time period is usually 20 years, but it can vary between 5 and 30 years depending on circumstances.
• If you don’t make payments as agreed, the lender has the right to sell your property in order to recover their money. This is rare but it is important to understand from the outset that if you do not keep up with your mortgage payments you are at risk of losing your home.
How much can I borrow for a mortgage? – Affordability Calculator
• This is often one of the first questions to be asked.
• Unfortunately it is not an exact science and all banks have their own methods to calculate affordability.
• Since the introduction of the National Credit Act this has become more complicated.
• The most accurate method of establishing how much you are eligible to borrow is to contact your Mortgage Plus Bond consultant.
Do I need to put down a deposit to buy a house? – Lump Sum Deposit Calculator
• Whenever you sign an offer to purchase you will be asked to put down a deposit.
• This will range from a few thousand Rand to 20% of the property price depending on the seller and estate agent.
• The act of putting down a deposit is an act of goodwill and is a show of commitment.
• Whenever you sign an offer to purchase you will be asked to put down a deposit.
• This will range from a few thousand Rand to 20% of the property price depending on the seller and estate agent.
• The act of putting down a deposit is an act of goodwill and is a show of commitment.
When and to whom is the deposit paid?
• The deposit is usually paid within a time period stipulated in the offer to purchase. This time period is for you to negotiate with the estate agent, but the norm is 2 weeks from the date of signature. This deposit does not go to the seller but is paid into the conveyance attorney’s trust account. Some estate agents may ask you to pay the deposit into their trust accounts.
• These trust accounts are interest bearing. If your deposit is going to be sitting there for a long time before transfer, be sure to ask the attorney what the rate of interest is on the trust account in order to know how much interest you will be earning on it.
• Some lenders will offer loans, particularly to first time homeowners, to cover the purchase price and also the additional purchase costs. This is commonly known as a 108% home loan (because it is 8% more than the value of the house). If you are planning on applying for a 108% loan you will probably still have to put down a deposit to secure the property when you sign the offer to purchase. This deposit will only be released back to you on transfer. Please note the 108% loans is not always available.
• The deposit is usually paid within a time period stipulated in the offer to purchase. This time period is for you to negotiate with the estate agent, but the norm is 2 weeks from the date of signature. This deposit does not go to the seller but is paid into the conveyance attorney’s trust account. Some estate agents may ask you to pay the deposit into their trust accounts.
• These trust accounts are interest bearing. If your deposit is going to be sitting there for a long time before transfer, be sure to ask the attorney what the rate of interest is on the trust account in order to know how much interest you will be earning on it.
• Some lenders will offer loans, particularly to first time homeowners, to cover the purchase price and also the additional purchase costs. This is commonly known as a 108% home loan (because it is 8% more than the value of the house). If you are planning on applying for a 108% loan you will probably still have to put down a deposit to secure the property when you sign the offer to purchase. This deposit will only be released back to you on transfer. Please note the 108% loans is not always available.
Does the size of the deposit matter?
• Generally the larger the deposit (as a percentage of the value of your house), the better the interest rate you can negotiate with the bank.
• This is because the lenders know that if you default on your loan and they repossess the property, there is more chance of them getting their money back on the sale of the property. Hence there is less risk to the lender.
• The larger the deposit you put down, the lower the rate of interest you are likely to get.
• A larger deposit also reduces the risk of you going into negative equity, where the value of your house falls below that of your mortgage. This makes it difficult to sell your house because the proceeds won’t cover the debt you owe.
What additional costs are associated with mortgages? – Pre approval and Bond Cost Calculator
The main additional costs are:
• Transfer fees
• Conveyance fees
• Bond registration fees
• Valuation fees
• Initiation fees
What are transfer fees?
• Transfer fees are payable to the South African Revenue Service (SARS) whenever you buy a house valued at over R500 000. • Calculated as a percentage of the purchase price and vary according to the purchaser’s legal status.
• The transfer duty is paid by the purchaser of the property prior to registration of transfer, or within six months of signing the agreement.
• There is a penalty fee for late payment of transfer fees.
• Contact your Smartbridge mortgage consultant to work out your transfer fees.
• Transfer fees are payable to the South African Revenue Service (SARS) whenever you buy a house valued at over R500 000. • Calculated as a percentage of the purchase price and vary according to the purchaser’s legal status.
• The transfer duty is paid by the purchaser of the property prior to registration of transfer, or within six months of signing the agreement.
• There is a penalty fee for late payment of transfer fees.
• Contact your Smartbridge mortgage consultant to work out your transfer fees.
What are conveyance fees?
• Conveyancing (attorney) costs.
• The conveyancing attorney is appointed by the seller, but paid for by the buyer.
• Conveyancing fees are on a sliding scale that your Smartbridge mortgage consultant can give you.
• Conveyancing (attorney) costs.
• The conveyancing attorney is appointed by the seller, but paid for by the buyer.
• Conveyancing fees are on a sliding scale that your Smartbridge mortgage consultant can give you.
What are bond registration fees?
• Bond registration (attorney) costs.
• The attorney registering your bond will charge a fee.
• They receive instruction from the bank that has approved your home loan, draw up the paperwork, do FICA checks and lodge this with the Deeds Office.
• These attorneys should be in touch with you within a week of your mortgage being approved. They will ask you to come into their offices to sign the necessary documents.
• Bond registration fees are charged on a sliding scale.
• Your Smartbridge mortgage consultant will be able to inform you how much these will be.
• Bond registration (attorney) costs.
• The attorney registering your bond will charge a fee.
• They receive instruction from the bank that has approved your home loan, draw up the paperwork, do FICA checks and lodge this with the Deeds Office.
• These attorneys should be in touch with you within a week of your mortgage being approved. They will ask you to come into their offices to sign the necessary documents.
• Bond registration fees are charged on a sliding scale.
• Your Smartbridge mortgage consultant will be able to inform you how much these will be.
What are valuation fees?
• Bank valuation fees.
• After the introduction of the National Credit Act the banks no longer charge a valuation fee but have included it in their increased initiation fee.
• Bank valuation fees.
• After the introduction of the National Credit Act the banks no longer charge a valuation fee but have included it in their increased initiation fee.
What are mortgage broker fees?
• Mortgage brokers are paid a commission by the lender for every mortgage organised on behalf of their clients. A mortgage broker should not charge their client a fee.
• As a client, always ask your mortgage broker about their commission relationships with lenders. Good brokers will always disclose this information.
• You will require significant additional funds to cover the deposit and fees. Remember to include these costs when calculating how much you can afford to spend on a house.
How much will my mortgage interest rate be?
Your mortgage interest rate will depend on a number of factors such as:
• The loan to value ratio (the size of your mortgage compared to the price of the house you are buying or own).
• Your repayment to income ratio (the cost of your monthly mortgage repayment to your gross monthly income).
• The size of your bond.
• Your credit profile.
• Contact your Smartbridge mortgage consultant for advice on your likely interest rate.
• The interest rate charged on your mortgage is crucial. It will determine how much you can afford to borrow and therefore how much you can afford to spend on a house
How is mortgage interest charged?
• In South Africa, interest is generally charged daily on your mortgage.
• Some lenders will allow you to pay your mortgage payments twice a month. This will dramatically reduce the amount of interest you will pay over the lifetime of your mortgage.
• Speak to your Mortgage Plus Bond consultant for more information.
Which type of mortgage is best?
• Most people will want the cheapest deal they can get on their mortgage.
• You may have to compromise on cost in order to get something that is more flexible.
• Fixed-rate deals are popular in the rest of the world but few South African mortgages are on a fixed rate. This is due to the uncompetitive rates offered by banks on fixed mortgages to offset the risk of volatile interest rates.
How do lenders structure a mortgage?
• The lenders take the loan required (this is known as the principal sum) and then work out the interest you will owe them over the full term of the mortgage.
• This is in effect an additional sum you now owe the lender.
How do I apply for a mortgage?
• Contact your Mortgage Plus Home Loan Consultant for the best possible deal. • Make sure you have as much information as possible when applying for a mortgage. This means exact salary details for you and your partner, exact details of expenses and debts, when bonuses are paid and details of any loans/mortgages already held. • When you are ready to apply for your mortgage, you should aim to complete the process quickly as lenders will state a time period during which they will guarantee the rate you have been quoted. This means you won’t be affected should interest rates rise. You will then have to wait to see if your mortgage is approved.
Your maximum monthly mortgage payment is based on your monthly disposable income. To calculate your monthly disposable income: • Subtract all your deductions such as tax and UIF from your gross income to get your net income. • Calculate your total monthly expenses, such as groceries, car insurance etc. • Subtract your monthly expenses and existing debt such as credit card, vehicle finance, or loan repayments from your net income. • The balance (if there is any) is your potential maximum monthly mortgage payment.
I have additional sources of income, how will this affect my mortgage application?
• Lenders will take into account additional income you may have such as rental income, investments and dividends etc. • Lenders vary in how they view additional income streams. • Contact a Mortgage Plus consultant to assess and discuss your options.
Can family members make a contribution to my mortgage application?
• Yes.
• You can take into account contributions from family members if they are living on your property. • If a partner or child is making a contribution to the family finances, then the banks will recognise it. • It is your responsibility, as the borrower, to prove these family contributions.
I earn commission, how does this affect my mortgage application?
• If you are a commission earner the banks will take this into account. • The best way to prove this to the bank is to provide pay slips for six months and then to calculate your average monthly commission earned.
Is my annual bonus taken into account in my mortgage application?
• Yes.
• Annual bonuses are taken into account but you will have to prove them with entries on your bank statements and letters from your employer.
By choosing Mortgage Plus for a loan, you will get that continual service to make sure you are getting the best deal 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.
Complete this short form online
Call us on 011.327.4489
Email: morne@mortgagepluscc.co.za
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