Of course life would be much easier for estate agents if all their buyers were able to secure 100% home loans – but would it be the right thing for buyers?
Not necessarily, says Rudi Botha, CEO of SA’s biggest mortgage originator BetterBond, because lenders seldom grant interest rate concessions on 100% loans, and even a 1% concession on the interest rate that homebuyers are charged can have a major effect on their financial future, especially when taken over the 20-year lifespan of most mortgages.
“On a R1m bond, for example, an interest rate of 8% instead of the current 9% ‘standard’ rate would first of all automatically translate into interest savings of more than R151 886 over 20 years – which is money that could come in very handy when paying for a child’s tertiary education, for example.”
In the second place, he says a lower rate generally makes it easier for buyers to obtain a bond to begin with. In the example above, the minimum monthly repayment would be about R8400 instead of R9000, which means that the buyer would probably need to earn about R2000 a month less to qualify for the loan.
“And this might make all the difference between being able to buy right away and having to wait another year for a salary increase – by which time property prices will very likely have gone up too.”
Thirdly, says Botha, the lower minimum monthly repayment on a lower rate loan may just put the homeowner in a position where he is able to pay the loan off faster and save even more interest. “The buyer who is able to pay an extra R200 a month on the 8% loan, for example, will pay off the loan a whole year early – and shave off another R65 000 in interest.”
However, the fact is that there is really only one way these days that most buyers can even hope to qualify for a rate concession, he says, and that is to pay the biggest deposit possible.
“Of course, telling buyers this does not make agents or originators very popular, but once buyers see the very substantial benefits they stand to gain, they often start to think about deposits differently.
“And at the very least, they are likely to be in a better position to obtain a bond. The latest BetterBond statistics indicate that about 60% of loans approved are going to borrowers with a deposit – and that the average deposit required is lower than last year.”
Mortgage insurance, or homeowner’s insurance, can be a grudge purchase when you’re excited about buying a new home. But a house is a massive investment, and a home loan is a long-term commitment, so it’s not just legally necessary to make sure you have home insurance, it’s also the responsible thing to do.
If you have a home insurance policy that covers your bond, and you become ill or incapacitated for any reason, your insurance will help you with your monthly bond payments, alleviating some financial stress when you can least afford to have any. Having life insurance means that your family will also be protected from debt when you pass away. Death is never an easy subject to think about, but it is inevitable, which is why it’s important to plan ahead.
Since the introduction of the National Credit Act on June 1st 2007, consumers have been allowed to shop around for mortgage protection and life insurance, instead of automatically having to sign with the bank from whom they received their home loan.
This means that you, as the home buyer, have the freedom to apply for a bond with one institution, but ‘shop around’ for a better deal on the insurance elsewhere.
Don’t cheat yourself- or your family- by not being properly protected against the future, but do make sure you get the deal that really works for you.
BetterBond’s partner, BetterSure, can help you look for the insurance policy that meets your needs and your budget, so why not make sure you’re getting the best deal on your home loan- and on your home loan insurance?
Contact us on:
- Tel: 0800 007 111, Fax: 0866 714 264
- Email: firstname.lastname@example.org
The imminent implementation of the new Basel III rules on banking capital and liquidity will undoubtedly make it more difficult and more costly for homebuyers to obtain mortgage finance.
That’s the word from Rudi Botha, CEO of BetterBond, SA’s biggest bond originator, who says: “In our business, we have already seen interest rate concessions on home loans decline over the past few years from an average of 1,5% below prime to the prime rate with most borrowers now having to pay the prime rate of 9% or more.
“The average interest rate granted to customers by banks on the R2,4bn worth of home loans originated by BetterBond in March is now at prime, whereas the average four years ago was prime minus 1,5%.
“And with the implementation of the Basel III rules, we and many key industry people expect that the ‘standard’ home loan interest rate will have to be set one or possibly even two percentage points above prime, because the cost to the banks of funding these loans will rise that much.”
In addition, he says, it is likely that the banks will have even less appetite for long-term lending than they do now, and increasingly prefer to make short-term loans rather than 20-year home loans.”
“In short, Basel III means it is going to get even tougher for homebuyers to qualify for home loans in terms of the income requirements and their credit records, and that they are generally going to be able to afford a lower purchase price than they thought.”
The likely effects of the changes are illustrated by the fact that on a R1m loan amount at a rate of 10%, the monthly repayment would be R9650, compared to R8997 at a rate of 9% over 20 years. “This increase in repayment of more than R650 monthly will impact the affordability of the buyer and the total loan obtainable from a repayment-to-income (RTI) point of view, meaning that this same client will in all likelihood only qualify for a loan amount of R950 000 instead of R1m,” says Botha.
The same exercise on a R500 000 loan amount shows that at a 9% interest rate over 20 years the monthly repayment would be R4498 and at 10%, R4825. The increase in repayment being R326 would impact the buyer’s affordability and this, coupled with the impact it would have on the client’s RTI ratio, would only qualify the buyer for a loan amount of R470 000.
What is more, Botha says, this scenario does not even take into account the expectation that in response to rising inflation, the Reserve Bank will possibly start to raise interest rates again within the next 12 months.
The combined effect of these possible increases, firstly by the banks and secondly by the Reserve Bank to 11% from the current rate of 9% would result in an increase in the monthly instalment on a R500 000 loan from R4499 to R5161, and that on a R1m loan from R8997 to R10 322, he notes.
“And the increases may well not stop there, which is why we believe the time has come for borrowers to consider the possibility of fixing the interest rate on their home loan for a period of time.
“In addition, those who are contemplating a home purchase should not delay too long, as the opportunity for them to qualify for the home loan they want will become more difficult should Basel III be implemented in its current format.”
The implementation of Basel III rule will undoubtedly have a major impact on the consumer’s ability to afford property. In saying this, it’s imperative that these considerations be taken into account when the final decision is taken to implement Basel III.
To make sure you get the best home loan possible, at the rate you can afford, visit www.betterbond.co.za
The safest way of purchasing a home is to have your estate agent or attorney draw up the Offer to Purchase Document for you.
They should then thoroughly explain each and every clause. This will guarantee hassle-free paperwork and avoid disappointments.
The Offer to purchase is a binding contract once it has been signed by all parties concerned. The verbal sale of property is invalid.
You as the buyer are responsible for payment of all costs and fees in regard to registration of the bond and for the transfer duty.
Make sure you budget for this expense. Calculate costs and expenses at the BetterBond website here:
Once you have found the property you want to buy, it’s time to put in an offer.
Remember that the asking price is how much the seller hopes to get for the property – not necessarily how much they realistically expect – and your first offer can be below the asking price.
Once you have made an offer, it is up to the seller to accept or reject it.
It is also possible that other buyers are putting offers in at the same time, so it’s a good idea to research into the typical price of such a property or you may find yourself caught in a bidding war.
If the seller does reject your first offer, you can always put in a higher offer later.
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