Buying a home is often the single biggest investment most people make. As a result it is essential for home buyers to ensure they are fully prepared before getting on to the property ladder. South Africa’s leading bond originators, answers ten questions  for new homebuyers to consider:

1.      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.

2.      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 historic pattern of borrowing and repayment as well as how you have managed you bank accounts and other credit facilities.

3.      Why should I consider a bond originator?

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.

4.      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.

5.      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.

6.      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 that you apply for, 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.

7.       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.

8.      Can I afford to put a deposit down?

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.

9.      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.

10.     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:

Complete this short form online

011.327.4489 / 0861 1111 93

morne@mortgagepluscc.co.za

www.mortgagepluscc.co.za

When calculating repayments leave a margin for interest rate rises

With South African interest rates at almost record low levels, there is, says Lanice Steward, Managing Director of Anne Porter Properties, a danger (as has happened more than once in South Africa’s history) of inexperienced buyers forgetting that interest rates will inevitably rise in the end, with the result that those on limited resources are likely to find themselves severely stretched to service their bonds.

“Right now,” says Steward, “many commentators are, in fact, predicting an interest rate rise before the end of this year. It may not be that high, but it could be the prelude to ongoing rises.”

When calculating the monthly anticipated expenditure on bonds, homebuyers, says Steward, should leave a buffer for possible interest rate rises. The current rate of 9%, she says, comes not all that long after the 1998 peak when rates rose to 22,5% – and while it is highly unlikely that South Africa will see rates at that level again in the next decade, it has to be accepted that 9% is low by South African standards and almost certainly not sustainable in the long term.

“Looking back at the ten year period that preceded the 1998 high,” says Steward, “one can see a steady increase from 6,5% in 1958 to 8% in 1968, 12% in 1978 and 18% in 1998. Once interest rates start to rise it takes major economic reversal to turn them around.”

It could, adds Steward, be significant that the Cost Price Index – which rose to 3,7% in January this year – has been moving up since September 2010 and will inevitably affect the increases oil and food prices.

“Under the National Credit Act restrictions,” says Steward, “it is more difficult than previously to get into financial difficulties on bond payments, but in three to six years’ time interest rates could have risen to close to the levels that we were accustomed to previously and this could make it financially difficult for bondholders. The secret, therefore, is to limit your expenditure, knowing that whatever you buy will put you in a position to upgrade in four to ten years’ time if you so wish.”

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

www.mortgagepluscc.co.za