Before you apply for a home loan, It’s essential to understand the different types of home loans in South Africa. First, you need to understand the following terms:
- Home Loan: Money that a bank lends a purchaser with an intention to buy a property.
- Mortgage Bond: Security over a property bought with a home loan.
- Interest Rate: The cost of borrowing money typically expressed as an annual percentage of the loan.
- Repo Rate: The interest rate at which the central bank lends money to commercial banks.
Different Types of Home Loans (Summary)
|Fixed-Rate||First-time Buyers||Capped Rate||Variable|
|Advantages||Helps you to avoid increased interest rates.||Lender gives 100% of the purchase price, which includes the registration and transfer costs.||Security of a variable interest rate without locking in a fixed rate.||You may benefit if overall market interest rates drop.|
|Disadvantages||If the interest rates drop, you will still be paying the same fixed rate.||Very strict criteria.||Qualifying for these types of home loans is quite difficult.||Interest rate attached to the base home loan rate, which goes up and down.|
Types of Home Loans in South Africa
First-time Buyers Home Loans
You’ll have a fairly good idea of whether or not you can afford to buy a home if you are secure in your job and earn a regular monthly salary.
However, the revenue can be volatile if you are self-employed, making it more difficult to know for sure if you are in a position to buy.
To place a deposit on the home, you will need to have money saved, and you will also have to consider moving costs, homeowners’ insurance, and rates on your property. It’s important to calculate all your monthly expenses and expenses involved in buying your first home to ensure you can afford the purchase.
As a general rule, your bond repayments should not exceed 25 percent to 30 percent of your gross income, along with taxes and property insurance. Before applying for a home purchaser mortgage, it is also a good idea to attempt to pay off other debt you may have such as personal loans or credit card debt).
As a first time home buyer, if you are 18 or older, you may apply for the Finance Related Subsidy Program; if you are “competent to legally contract;” you fall within the specified earnings bracket; you have dependents, and you have already secured the approval of a bank for a home loan in principle.
The value of the subsidy is estimated on the basis of monthly income – from a minimum of R 27,960.00 to a maximum of R 121,626.00 – and can be used for the purchase of a current, new, or old subsidy residential property or a vacant serviced residential stand – or you can place it on a piece of land you currently own at the cost of building a home.
But only after you have found a property that you can afford to buy can you apply for a subsidy – and a lender (bank) that is able to fund the purchase. Payment is made according to your requirements: if you are going to use it to “make good any shortfall between the eligible loan sum and the unit’s purchase price,” it is paid into the “trust account of the transferring solicitor on notice of readiness to lodge the transfer papers,” but if you are going to use it to “reduce the principal loan amount to pay the loan repayment installments.
- You must receive per month between R 3,501 and R 22,000 and be 18 years of age or older.
- You must seek permission from your bank for a home loan.
- Your request can be made after you have identified a property that you want to buy.
- Between 27,960.00 and R 121,626.00, the subsidy will amount to anything and will be calculated according to your monthly income.
- First-time buyers who would live in the homes they purchase are mostly the individuals who get no-deposit loans.
A capped rate is an interest rate which is allowed to fluctuate, but which is unable to exceed the interest cap specified. A capped rate loan issues a starting interest rate that is typically a defined spread above a benchmark rate. An interest rate on a loan that has a maximum limit on the rate built into the loan is a capped rate.
A capped rate adjusts below the limits of the cap based on a benchmark interest rate. Capped rates limit the risk of increasing interest rates for the borrower and enable the lender to earn a higher return when rates are low. Capped rate loans, with different fixed and capped components and limits on adjustments over time, can be structured in many different ways.
Capped rates are supposed to provide a hybrid of a fixed and variable rate loan to the borrower. Capped rates limit the risk to the borrower of increasing interest rates and allow the lender, when rates are low, to earn a higher return. Capped rate loans can be structured in many different ways, with various fixed and capped components, and limits on adjustments over time.
The fixed part occurs when the loan rate begins to go above the capped rate, but the cap acts as a ceiling and prevents the rate of the loan from rising. The variable part comes from the ability of the loan to move up with market fluctuations (until it hits the cap) or down.
The capped rate structure also provides the lender with some protection by being able to participate upside down in the market and receive higher interest rate payments up to the cap as rates rise. Your credit has a variable rate of interest that can move up and down.
There is a maximum interest rate, limiting your risk effectively. If interest rates rise significantly, you benefit when interest rates drop and can still be protected. Cap up to three years of your rate, after which you can recap, fix, or switch to a variable rate.
On the other hand, depending on existing rates, a capped rate loan can move up or down. However no matter how high, if there is a significant rise in prices, you are protected and your rate can not go over the agreed cap. Typically, capped rate home loans are cheaper than fixed rates.
This type of loan is more flexible and comparable to variable rates, where extra repayments can be made without penalties (maximum extra payments of 50 percent of the loan amount within the capped term). You will be protected from any unexpected market increases in interest rates.
Capped Rate Loans are conventional variable rate home loans with a ceiling on the maximum interest rate that can be charged by the lender.
Over time, but only within a restricted range, the interest rate will still move up and down. The shortcoming of this type of loan is that to begin with, the interest rate is higher than the normal rate.
The word “fixed-rate mortgage” applies to a home loan that for the entire term of the loan has a fixed interest rate. This ensures that the mortgage bears a steady rate of interest from the beginning. There is a defined interest rate, a set payment schedule, and a set duration for any fixed-rate mortgage.
The borrower will know exactly what their payment is for the entire duration of the loan through a fixed-rate loan.
For fixed-rate mortgages are common items for customers who want to know how much they’ll pay every month, terms will vary anywhere between 10 and 30 years. For the full term of the loan, a fixed-rate mortgage is a home loan with a fixed interest rate.
The interest rate doesn’t fluctuate with market conditions until locked-in. Borrowers who want predictability and those who want to keep the property for the long term tend to favor fixed-rate mortgages. Amortized loans are the most fixed-rate mortgages.
Select a lender and apply after you decide you need a loan. Tell the lender you’re interested in a fixed-rate loan when you apply. The lender will give you loan terms, usually 15 or 30 years, if you qualify.
Sometimes, lenders do so with several rate options when they give you a fixed-rate loan, with rates that go down as you pay more upfront to secure your loan.
You’ll make regularly scheduled payments until you close your loan (typically monthly)A percentage will cover the interest that accrues between payments for each payment you make, and the remainder will go towards the mortgage principal.
A greater portion of each payment goes towards the interest in the early years of your mortgage, while much goes towards principal in later payments.
At the end of the term, if the loan is completely amortized, meaning you will not be allowed to make a lump-sum or balloon payment, and you will never make an additional payment, you will know precisely when the loan will be paid off and how much interest you will pay for the life of the loan.
Any additional money will go directly to the principal outstanding on your loan if you pay more than is required for any given month. Just be sure to tell your servicer to guide your principal with the extra money. You’ll pay off your loan earlier than your term suggests when you make additional payments.
Variable Home Loans
A type of home loan in which the interest rate is not set is a variable rate mortgage. Interest payments would instead be adjusted to a degree above a particular index or reference rate.
Lenders may give variable rate interest to borrowers over the term of a mortgage loan. A hybrid adjustable-rate mortgage (ARM) can also be provided, which involves both an initial fixed term followed by a variable rate that resets thereafter periodically. A variable rate mortgage uses a floating rate for part or all of the duration of the loan, instead of providing a fixed rate of interest throughout
The variable rate, such as LIBOR or the Fed funds rate, will most frequently use an index rate and then apply a loan margin on top of it. An adjustable-rate mortgage, or ARM, which would usually have an initial fixed-rate term of several years, is the most common example, followed by standard adjustable rates for the remainder of the loan. Variable home loans usually feature low rates, redraws, and options for additional repayment. B sure that if rates start to increase, you can cover repayments,
- The rate of interest varies and is tailored to your risk profile.
- Flexible intervals of up to 20 years.
- Access surplus funds on the valuation of your property after your home loan is built through a range of additional lending options
- Available in-house insurance options: bond security and cover for homeowners.
- A variable interest rate loan is a loan in which, as market interest rates adjust, the interest rate paid on the outstanding balance changes.
- The interest paid on a loan at a variable rate of interest is related to an underlying benchmark or index, such as the rate of federal funds. As a consequence, the payments can also differ (as long as your payments are blended with principal and interest).
- Variable interest rates can be seen in mortgages, credit cards, personal loans, derivatives, and corporate lending.
What’s the best type of Home Loan in South Africa
This is part two of my conversation with Nicolette Mashile. Start by reading this post and listening to the episode about the fundamentals of a home loan.
Listen to the full episode on the UNPACK Podcast
- Are all home loans the same?
- Do you recommend getting a 100% home loan (where your home is entirely funded by the bank, no deposit required)?
- The differences between:
- Capped Rate Home Loan
- Fixed-Rate Home Loan
Reach out to Nicolette Mashile
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