A home loan, also known as a mortgage, is a loan used to finance an established residential property. There are many people who simply do not have the immediate finances to pay cash for a home. Banks and home loan institutions offer loans that are specifically tailored for people who want to buy property.How does it work?
If you do not have the immediate finances to buy property, then you have the option of applying for a home loan. If you are granted the loan the bank will pay the full selling price of the property that you wish to purchase. Consequently, you will be liable to your home loan provider for the full loan amount and whatever interest is incurred over the repayment period.
The loan amount required to finance a property is no small sum. Repayments will therefore be spread over several years, anywhere between 5 and 30 years. The most common repayment period is 20 years.Monthly bond repayments will begin as soon as your bond has been registered, and the monthly amount will be determined by the repayment period that you choose. The bank or home loan provider will also charge you interest on the sum that you owe. The interest rate is determined by your home loan provider, the repayment period that you select and the type of loan that you decide on.
Types of Home Loans
The most common home loans in South Africa are the fixed rate home loan and the variable rate home loan.
1:Fixed Rate Home Loan
A fixed rate home loan offers you a fixed interest for a set period of time. You will be able to decide how much of your home loan you want to fix, either the whole sum or a portion.
Security and peace of mind are the main benefits offered by this type of loan. A fixed rate home loan allows you to avoid the anxiety that accompanies sudden rate increases.
2:Variable Rate Home Loan
A variable rate home loan is related to the South African overall home loan rate, the ‘repo’ rate. If you opt for this type of loan, your monthly repayments will be affected by market conditions, so if the SA home loan rate increases, your home loan rate will increase as well and so will your monthly repayments.
This type of home loan is only beneficial when market conditions are favorable. There is a certain level of uncertainty and risk that accompanies a variable rate home loan. It is especially dangerous for those who can only just afford the loan to begin with.
What are the Lending Criteria?
As with any loan, there are certain criteria that you will be required to meet. These criteria differ from one home loan provider to the next.
Generally, you will have to provide proof that you earn a specified single or combined monthly income. This will determine whether you are able to afford the monthly repayments. Your credit profile will also determine whether you meet the lending criteria of a home loan provider. Most providers will ask you to provide proof of your employment history, your income and your consumer bureau results. This determines whether you are credit risk to the bank or home loan provider.
Take a Moment to Consider
If you’ve found the home of your dreams, then you may be considering a home loan. Weigh up your options carefully and make sure that you meet the lending criteria. A loan to finance a property is a significant sum and requires a long-term commitment. Make sure that the time is right.