Frequently Asked Home Loan Questions with BetterCompare - BetterCompare
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HOME LOANS

Buying your first home? We’ve got the answers to your burning questions





Buying a home is likely the biggest purchase that you’ll make in your lifetime. As a first-time buyer, the prospect can seem a little (okay, a lot!) daunting. Home loans, deposits, OTPs, credit history, prequalification… You have questions. We get it. But don’t panic: we’ve got all the answers.

I’m dreaming about buying my first home. Where do I even begin?

Before you start searching for properties for sale and falling in love with the house of your dreams, you need a clear understanding of what exactly you can afford.

Start by finding an online home loan affordability calculator (try your financial institution or a reputable property website). You’ll be able to see in seconds how much house you can get for what you can afford in monthly repayments. Keep in mind that general wisdom says that your bond repayments shouldn’t exceed 25–30% of your income before tax. Once you know what your house price range is, you can start the hunt for your dream home.

Is that it? Are there any other costs to consider when working out how much I can afford every month?

It’s important to consider the additional expenses that come with owning a home. Sure, there are rates, taxes, and levies, but there will be extra costs that include security, ongoing maintenance and property-specific extras (garden or pool upkeep). These extra expenses are going to eat into your monthly income, so you need to make sure you’re able to afford everything on top of the home loan repayments.

It’s important to consider the additional expenses that come with owning a home – security, ongoing maintenance and property-specific extras (garden or pool upkeep).


How much do I need to save up for a deposit – and why, exactly?

A standard deposit amount is 10% of the property purchase price, though this could be higher or lower, depending on your negotiations with the seller. A deposit is a show of good faith: it proves to the seller and your home loan provider that you’re committed to the deal.

And while it may hurt to part with such a lump sum upfront, you’ll reap the rewards further down the line. The higher your deposit, the less you’ll have to borrow, which means less interest paid overall.

Someone told me I need a stack of cash when buying a house? Isn’t that where the home loan comes in?

Unfortunately not. Even if you get a 100% home loan (more on that later), there are a few additional one-off costs that you need to pay in cash that a home loan may not cover. These include bond registration, conveyancing fees, transfer duties (for properties over R1 000 000), and various administrative fees.

Let’s circle back to that 100% or 105% bond. What is that?

A 100% home loan covers the entire cost of your property. This means that you won’t need to put down a cash deposit, but you’ll still need to cough up to cover the bond registration and transfer costs.

A 105% home loan covers the price of the property and all those associated hidden costs. These home loans are typically reserved for first-time buyers and for properties that cost less than R1.8 million.

A 100% home loan means that you won’t need to put down a deposit, but you’ll still need to cough up to cover the bond registration and transfer costs.


That sounds ideal! What’s the catch?

A 100% or 105% home loan may seem more appealing than saving up for a deposit, but keep in mind that the monthly repayments and overall interest paid will end up being higher. To qualify for a 100% or 105% home loan, you’ll also need an excellent credit score and the ability to afford the instalment should interest rates increase.

What are my chances of qualifying for a home loan?

Do you have a regular, secure monthly income? That makes you a pretty attractive candidate for any loan.

Self-employed? Have a variable or unpredictable income? This can make it a little more tricky – but not impossible – to qualify for a home loan. Lenders prefer the certainty that you’ll be able to keep making your repayments month after month, so if you fall into one of these categories, there may be a little more hoop-jumping to get your application approved. They’ll also look at your credit score and how much cash in hand you have – that is, how sizable a deposit you can lock down.

Hmm. ‘Credit score’, you say. Can you elaborate?

Do you have a regular, secure monthly income? That makes you a pretty attractive candidate for any loan.

Your credit score is determined by your debt history. It’s effectively a measure of how good you are at paying back the money you’ve borrowed, whether that’s an R1000 store account balance for new sneakers or a R1 million house. Everyone has access to a free credit report once a year. Contact a credit bureau such as Experian, TransUnion, or ClearScore ZA to get yours.

Your credit score is effectively a measure of how good you are at paying back the money you’ve borrowed.


Okay, I’ve got my credit score. But what does it all mean?

A score of 650 and above is considered good.

Below that… You’ve got some work to do before applying for a home loan. Clear any lingering debt (we’re looking at you, overdrafts, credit cards, store cards and small loans) and pay any outstanding bills.

Improving your credit score will not only give you the best chance of having your home loan approved, but you may also qualify for a better interest rate!

What else will affect my interest rate?

Right, so we’ve figured out that interest rates on home loans vary from person to person, based on what the bank is willing to offer and how much of a risk they consider you to be (which is based on – say it with us now – your credit score).

But there is another external factor that will affect your interest rate, and that’s the repo rate. This rate is determined by the South African Reserve Bank. It’s the rate at which they lend to commercial banks. The repo rate then affects the prime rate: that’s the repo rate plus what banks add on to make a profit (they’re not lending you the money for free!).

If your interest rate is linked to prime, it means that as the SARB changes the repo rate, the banks will change their prime rate, which in turn will affect your personalised interest rate and, ultimately, your monthly instalments. Depending on how things are going in the economy, your instalments could be raised or lowered over the term of your loan.

So much fluctuation! Can’t I just have one set interest rate so I know what’s coming every month?

Sure you can. This is called a fixed interest rate.

The major pro here is that your rate is fixed regardless of what’s happening in the economy. The major con here is that … your rate is fixed regardless of what’s happening in the economy!

Ultimately, it depends on your financial preferences. If you want to know exactly what you’re spending each month, a fixed interest rate may be for you. However, it’s more of a risk for the bank, so you may end up with a higher interest rate upfront than if you opted for a variable rate. It’s also important to note that fixed interest rates are only applicable for an initial agreed period, after which you’ll have to renegotiate with the bank.

If you’re happy to have a little uncertainty, a variable interest rate may work for you. You could end up with the lowest interest rate seen in decades, as we’ve had in the past two years!

What’s all this talk about prequalifying for a home loan?

Prequalification for a home loan is essentially getting the lender to tell you what loan they would give you, hypothetically. Basically, all parties are doing their homework early so that once you find your home, the application process is already underway.

Getting prequalified means that you not only have a realistic idea of what you can afford, but your offer to the seller will be much more appealing because, when you’ve prequalified, the odds of your home loan application being a success – and the deal being closed sooner, which sellers love – are much higher.

Offer To Purchase: what exactly am I signing

You’ve found the perfect property (congrats!) and you want to buy it. You need to submit an Offer To Purchase, or OTP. This is a document that commits you to buying the property. It is a legally binding contract, meaning that if you secure the finance you have to buy the property. Once you’ve signed your OTP, it cannot be easily changed. Make sure that your finances are in order and you can afford what you’re committing to!

OTP. This is a document that commits you to buying the property. It is a legally binding contract, meaning that if you secure the finance you have to buy the property.

An Offer To Purchase is a legally binding contract, meaning that if you secure the finance you have to buy the property.


Do I need to take a home loan with my bank?

Nope. In fact, you should shop around for the best deal!

This could involve a lot of paperwork for you, but BetterCompare has taken the hassle out of the home loan application process! Our home loan comparison service will send your application to up to eight banks. You’ll receive quotes within three to five working days. Simply compare the quotes to find the best deal for you!

I’ve submitted my home loan application and it’s been ‘approved in principle’. Time to celebrate?

Keep the bubbly on ice for just a little longer. An approval in principle means your application has technically been successful. The next step is that the bank will send a representative to visit and evaluate the property to determine if its valuation represents its true worth. Once the bank is satisfied, your bond will be approved and a bond attorney will be instructed by the bank to register the bond.

Okay, bond approved. Now can I celebrate?

We’re almost there! Once your bond has been approved, it can take around three months for the bond to be registered. The attorneys take it from here.

Once all documents have been signed and the upfront costs paid, the documents will be lodged by the various parties and processed and registered by the deeds office. Only then will it be safe to pop the bubbles. Congratulations!


PUBLISHED DATE

18 July 2022


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© 2023 Better Compare (PTY) Ltd is an Authorised Financial Services Provider

(FSP no. 49357) 24 Flanders Drive, Mount Edgecombe, KZN, 4300