Planning to buy a home but lack the funds to pay for the property? There are ways to make your purchase more affordable and flexible to suit your financial capacity.
You can look into home loans offered in South Africa. There are banks and lending companies that can help you live in your dream house while you pay for it monthly.
What is a home loan?
A home loan is provided by lenders to those who lack enough funding to pay for a property in full. The lender holds the title deed of the property you’re purchasing as a form of security for the loan. The deed title won’t be awarded to you until you’ve fully repaid the loan.
How do home loans work in South Africa?
Banks are the most popular providers of home loans in South Africa. They profit from the varying interest rates borrowers pay for throughout the length of their loan contract. This is why when you’re getting a home loan, consider the amount you want to borrow and the repayment terms presented to you by the lender.
Home loans in SA usually have to be repaid within 20-30 years. This includes the principal plus interest accumulated throughout the whole period. Your home loan interest rate will be based on the rate dictated by the South African Reserve Bank (SARB). Monthly repayments may vary as the interest rates depend on the fluctuation of the prime interest rate.
Typically, you’ll be spending your first years paying off the interest your home loan is accumulating. Your repayments will eventually catch up and you’ll be able to cover the whole loan.
Adding a little extra on your monthly repayments can go a long way. Home loan Interest rates are computed on a daily basis, meaning your loan may increase or decrease in value. The latter is the ideal situation but to be on the safe side, assume that the former will happen more often which means your debt will continue to increase.
It’s best to repay your loan as fast as you can. The little amount you add every repayment decreases your balance, saving you money in the long run.
Types of home loans
One of the most critical elements lenders consider when they offer a home loan to a home buyer is the unique circumstances of each individual. To this end, homebuyers can access different types of loans to choose from.
The different options depend on the structure of the market in any country. In South Africa, there are basically three main options available. As you will notice, the main element distinguishing one type of home loan from the next is the way the interest rate is structured.
Variable Interest Mortgage Bond
The variable interest mortgage bond is probably the most common type of home loan. In this model, the interest rate is not fixed. As the name suggests, lenders offer a variable interest rate over the lifetime of the mortgage.
A variable interest rate (sometimes referred to as a “floating” or “adjustable” rate) changes over time depending on a given benchmark or the market conditions. When you choose this type of home loan, you can expect your interest rate to go up or down accordingly.
The advantage of this type of loan is that it starts with a low-interest rate and can adjust down in certain market conditions. Its disadvantage is that it will rise when market conditions change. Hence, you may not know what you will pay in the future.
Fixed-Rate Home Loan
Think of a fixed-rate home loan as the complete opposite of the variable interest type. As the term “fixed” implies, the interest rate on this loan remains fixed throughout the lifetime of the loan.
While this type of home loan may have a higher interest rate in the beginning, its main advantage is that it can protect you from changes in the market. This solution is preferable if you want to work out in advance what your repayments will be.
The main disadvantage of this type of home loan is that you will not benefit from a reduction in interest rates. This means that at the end, you may pay more for your property than someone using a variable interest mortgage bond.
Capped Rate Home Loan
The capped rate home loan has features of both the fixed and variable home loans. It is variable in that the interest rate can go up or down depending on a specific benchmark or market conditions. However, it is fixed because the fluctuation is restricted to a certain threshold.
The main advantage of this type of home loan is that it gives you the benefit of paying a lower interest rate when the rates go down. It protects you from paying too much interest if the rate rises above the cap. However, the cap in the interest rate means that you may not fully enjoy the benefits offered by extremely downward fluctuations.
In some instances, lenders can also offer home loans that guarantee a specified reduction in the interest rate over a given period. This will be assured whether the interest rate falls or goes up.
Another element that differentiates home loans is the period. In South Africa, the period of home loans ranges between 20 and 30 years.
Meeting the Requirements for Home Loans in South Africa
Because lenders want to protect their interests, they come with a set of requirements and checklists to determine if an individual qualifies. These are not uniform for all lenders and banks, but some are standard everywhere you go.
In the majority of cases, banks would require you to be an adult who can make decisions independently (read this to mean a minimum age of 21 and of sound mind). You will also have to show that you have the means to meet your financial obligations. Hence, you may be required to produce evidence that you are gainfully employed, and you have a record of meeting your financial responsibilities.
To make the process simpler, you may need to have the following in a place where you can easily access them.
- Proof of identification
- Payslip showing your take-home salary for at least three months (could be longer)
- Bank statements for at least six months
- Life cover
Several other requirements may be imposed on different groups. For instance, self-employed individuals may need to produce evidence from an accountant of the average amount they make every month. They may also be required to produce audited financials or management accounts for the last 24 or so months.
It is vital to find out from the lender what they need so that you don’t waste time going back and forth.
What about Prequalified and Preapproved
The process of qualifying for a home loan can also happen through a process called prequalified or preapproved. This is a route you would take if you want to get an idea of the amount you will qualify for.
In this case, the bank does not guarantee the loan; it just gives you an idea of the amount you have the highest chance of qualifying for if you were to apply for a loan.
The advantage of applying for a preapproved home loan is that you do not waste both your time and that of the home seller entering into a discussion for a property you can’t afford. It also helps with your planning because you get an idea of the interest rate you’re likely to pay, the aggregate bond amount and monthly installments.
For a pre-approval, you will need the same paperwork specified under the section on meeting the requirements.
The most significant factor lenders look into is your ability to repay the loan. They’ll be comparing the loan amount you’re applying for and the computed monthly repayments you have to accomplish. Your salary should provide enough leeway to repay the loan and pay for your daily necessities at the same time. It’ll be easier to get your home loans pre-approval if you have a permanent job.
Aside from your job stability and monthly income, there are other factors lenders consider in approving your SA home loan application. They’ll also take into account your age, credit history, the amount of down payment you can give, and any other debts you’re repaying. It’s a plus to them if you have other income streams that can improve your financial status.
Lenders will not approve your home loan application if the computed monthly repayments exceed 30% of your individual or joint (if you have a partner) gross income.
If you’re a foreigner who plans to buy a property in South Africa, expect restrictions and special rules to be imposed on your loan request.
Granting the Home Loan
When you have submitted all the paperwork, the bank will assess your creditworthiness. The score assists the lender in determining the risk that you may default. It is the basis for the interest rate that will mitigate such risk.
While modern technology makes the process of assessing the risk associated with your profile something that takes mere seconds, there are times when the lender may ask you to come in an explain certain aspects of your credit history.
If all is in order and the lender believes that the chances that you will honour your obligations are high enough, the bank will then pay for the house you qualify for. You can then move in.
Paying Back the Home Loan
Home loans in SA usually have to be repaid within 20 to 30 years. This includes the principal plus interest accumulated throughout the whole period. Paying more than the monthly installment can reduce the interest you pay and the subsequent total amount you end up paying for the property.
In case you fail to repay your SA home loan, you’ll be evicted from your house, and your property will be sequestered. It will be categorised as a property in foreclosure, and the bank will sell it in an auction.
The sale aims to help the lender to recover the remaining balance you owe. The proceeds of the sale will pay the remaining amount you owe, excluding the legal costs. You’ll be responsible for paying any amount incurred outside of the home loan contract.
There are other expenses you also have to consider in buying a property aside from the loan itself. It’s possible you have to also pay for attorney fees, cost of moving, and transfer duties. Consider these things in preparing to obtain a home loan in South Africa.
Top Home Loan Providers in South Africa
All the leading banks in South Africa offer home loans. Added to the leading banks are other lenders like Old Mutual and Investec. Below is a summary of each lender and a link to their websites.
SA Home Loans
SA Home Loans has helped debunk the idea that mortgage lending is a preserve of the big banks. According to the firm, it has almost 200,000 clients. It has originated more than R95 billion in home loans since it was started in 1999.
For more information, you can contact SA Home Loans at 0860 246810 or visit their website where you can start the application process.
In 2019, Standard Bank announced “an innovative way of pricing new home loans.” According to the bank, this new pricing model will see your interest rates reduce every month, leading to huge savings across the life of the home loan.
Learn more about home loans from Standard Bank here.
First National Bank (FNB)
FNB promises a world “where you have control of your selling and buying journey.” The banks have several options for individuals who want to buy homes such as the Smart Bond for people who earn between R2 500 and 10 000, the Flexibond for individuals who wish to access additional home loan funds, and the Future Use Home Loan to pay for extra costs linked to buying a home.
You can apply for an FNB on the bank’s website.
Nedbank home loans cover different circumstances. The conventional home loan enables buyers to finance an existing residential property. If you already have a home or piece of land, but you want to customise it to your needs, the building loan will probably be what you need. Other options which include a range of solutions for individuals struggling to service their home loans can be found here.
Before being overtaken by Standard Bank, ABSA used to be South Africa’s dominant bank for those looking for top of the range homes (Source). According to the bank’s website, its home loans “can be structured to suit your individual financial and family needs.”
The bank finances “all residential property, whether it’s a freestanding house, a flat, a townhouse or vacant land.”
You can start the application process here.
Capitec has been South Africa’s fasted growing bank for some time now. The bank offers home buyers up to R5 million payable over 240 months. Prospective homebuyers can get up to 100 per cent of the home value with an online application or 90 per cent if they apply at their branches in Gauteng, KwaZulu Natal, and the Western Cape.
The online application process can be accessed on their website.
Ooba Home Loans
Ooba Home Loan Services is not a lender. It provides a loan comparison service. The idea is to assist homebuyers in accessing numerous quotes and decide which one best meets their needs. Because Ooba gets paid by the banks, you don’t have to pay anything to use their platform.
To start the application process, you can visit the Ooba page here.
Old Mutual Home Loans
Old Mutual promises that its home solutions are inspired by the desire to make the process of applying for a home loan less daunting and less time-consuming. They promise that individuals applying for home loans using their solution only have to fill in one form. The banks pay for the service, so you don’t have to pay anything for it. It also includes expert guidance from qualified professionals.
A brochure with full information about the service can be found here.
According to Investec, the process of applying for a home loan is managed by a private banker who will take away the hustle associated with the process of applying for a home loan.
If you are interested in financing a home loan with Investec, you can start the application process here.
African Bank Home Loan Deposits
The home loan deposit solutions offered by African Bank is premised on the understanding that a deposit can substantially reduce the cost of a home in the long run. Hence, they have tailored solutions where homebuyers can grow their deposits before applying for home loans.
African Bank does not offer home loans. However, they provide tailored solutions to help prospective homeowners save towards a substantial deposit.
More information about how you can grow your deposit using the African Bank service can be found here.