Do you really need the whole home loan?

One of the great things about buying property is that it is relatively easy to gear the purchase – or use the bank’s money to finance most of the purchase price – and then keep the profit made on the entire asset when you decide to sell.

And the higher the gearing ratio – that is, the smaller the deposit and the bigger the loan – the greater the opportunity for gain.

balance house and money

However, higher gearing does also mean higher risk. Property prices fluctuate, in the short term, although historically the trend has always been upwards. If you buy a property with a deposit of only 5% and prices then fall 5%, you will lose your whole “investment” unless you can wait for prices to rise again before you sell.

Borrowers also need to consider that a lower gearing ratio – a bigger deposit – will generally mean a better chance of being granted a home loan at the most favourable interest rate, and of paying the loan off faster, so that the property owner will show a bigger “profit” when the time comes to sell.

Banks will determine how much you may borrow, based on your credit record and current income, and it is a good idea to be pre-qualified for a home loan, so you know what your limit is before you go househunting.

But as a prospective buyer, you also need to determine what size loan you would feel comfortable about repaying. Just because a bank is prepared to grant you a bigger-than-expected loan does not mean that you should immediately opt for a more expensive property or a higher gearing ratio.

Determining what size loan is right for you remains a personal decision and should take into account your overall investment strategy, as well as the property in question.

The buyer of a newly-built property for example, may need less cash to cover transfer costs or improvements and be able to put down a bigger deposit, while the buyer of an older home may decide to take a bigger loan and keep some cash in hand to cover the costs of repairs and renovation.

In general, it is good advice to put down the biggest deposit possible and keep the amount borrowed to the lowest level, but before you decide, you really should consult a mortgage originator such as BetterBond, so that a professional loan consultant can identify and present you with all your loan options.


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About BetterLife Home Loans

Since 2003 BetterLife Home Loans has been SA’s No.1 Bond Originator, handling the entire home loan application process on your behalf – free of charge! Our aim is still to source the best interest rate for you by submitting your home loan application to all the major banks. There is no easier way to apply for a Bond or Home Loan in South Africa!

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