There are many factors that need to be considered, from choosing your future home and securing a bond to moving in. If you have identified your home and have made an offer to purchase, the next step required is to secure your finance. In most cases, this finance is sought through a bank or a bond originator.
A home loan is a form of credit between a bank and an individual and is therefore regulated by a set of rules set out by law. As with any kind of credit, your credit score will affect how much you can borrow, the interest rate a bank will charge on our loan and the terms of your loan.
We want to arm people with as much knowledge as possible about investing in property and so in this post we unpack some of the most common property-related questions.
How is a home loan or bond different to any other kind of loan?
If you are not fortunate to be able to purchase a property for cash, you will likely have to take a bond with a bank. A bond is the same as a loan and is governed by a strict set of rules for both the lender (the bank) and the borrower (you). Banks cannot grant a bond unless they know if you are able to afford it so they will do a financial fitness test to see if you qualify. It is not only banks who lend money. When it comes to getting a home loan there are other financial service providers who specialise in home loan or bonds only.
Any sort of credit or loan often charges interest– this is a percentage of the value of your loan which you have to pay back along with the loan as part of a monthly instalment. The interest on a loan is not decided by the lender; it is mandated by the central Reserve Bank of South Africa. The Reserve Bank will set the prime interest rate which is currently 9.750%.
What does this mean for purchasing property?
The good thing for first-time buyers in South Africa is that banks are eager to lend money to people to buy homes and will do their utmost to help you get the bond you want. It’s also wise to know that not all banks are equal- some may have terms that differ when it comes to servicing the debt and some may be prepared to lend you more money than others so it serves you to shop around. A bond originator is someone who will help you shop around for a bond and help you to complete all the paperwork.
A lender will also ask you whether you want a fixed interest rate (so the interest on your loan will stay the same it was at the time of agreement for the duration of the loan term) or if you want a linked interest rate, that means your interest rate on your loan will fluctuate as the prime interest rate does. This can be beneficial depending on many economic factors- sometimes if the interest rate in uncharacteristically high it may make sense to opt for a linked rate in case the interest rate drops (you’ll pay less on your loan) but if the interest rate is uncharacteristically low then this is the best time to take a loan on a home and opt for a fixed rate.