What is a home loan?
Just as a loan is a form of debt provided by someone else to you, so a home loan is a type of loan provided by someone else or institution, to assist you in buying a home. Home loans are secured loan offerings specifically tailored to assist in buying residential properties. This means they have interest rates and repayment periods that are specific to the type of buying that will take place.
How it works
- You choose a residential property that you want to buy, but don’t have the money for.
- This loan amount can either be a partial amount or full amount, but is subject to the financial institution’s willingness to take on the risk of you as a client.
- The loan provider secures the loan against the property. This means consecutive defaults in payments can result in the loan provider selling the property to make their money back.
- The loaned amount is therefore legally bound to the property until you have repaid the full amount, which usually includes the initial loan amount, interest, and service fees.
- This repayment period generally stretches over a medium to long term.
What a home loan is not
It is important to note that a home loan in the usual sense of the loan term, is not the same as refinancing or remortgaging your home. This will in most cases consist of a different financial offering.
Why get a home loan and not just a loan?
This is one of the first questions that many South Africans will ask when they want to apply for a loan at a local or national financial institution. It is important to note that simply asking or applying for a general loan could mean unnecessary high interest rates and impossibly short repayment periods to pay back the loan amount. As with any other specific loan, a home loan is tailored to suit the needs for the product or asset you are buying. The loan has been structured in its most basic already to service the need of someone looking to buy residential property.
What factors contribute to a great home loan?
Unfortunately, as with many things in life, choosing your home loan is not only straightforward decision. There are some factors to include in your decision-making process. These can be divided into two aspects:
- Choosing a flexible or fixed interest rate;
- Choosing a repayment option that stretches over a medium or long term.
These are two simple factors that get complicated when you’re not sure where you are headed financially. This is why it is important to filter those two factors through some basic decision-making steps when it comes to your financial future. These can include:
- Affordability - what can you actually afford within your monthly cash flow?
- Current vs Future - will the value of the asset you are buying actually beat inflation and other costs and turn it into an asset? Remember, a true asset results in positive cash flow when you buy, not when you sell.
- Period of use - does the period in which you will use the residential property actually justify the setup cost?
- Economic climate - what is the current and foreseeable future economic climate in which you are borrowing the money?
- Insurance - what are the insurance implications that will impact you?
Tips on taking out a home loan
A bigger deposit will, generally speaking, allow for negotiating power when it comes to the interest a bank or financial institution is offering. There are no legally binding reasons why a deposit is necessary to buy a home, but most financial institutions will act more favourably towards your loan application because of it demonstrates lower risk and commitment.
Listing more than one source of reliable income could improve your chances on better interest rate offerings since you qualify as a lower risk for the financial institution.
There are some costs that many first time home buyers might not be aware of that include:
- Transfer fees
- Bond registration fees
- Conveyancing fees
- Bank valuation fees
- Bank initiation fees
- Mortgage broker fees
Never forget that you can buy a home to rent it out and through that make a positive cash flow after you have all mortgage related costs. But, as said above, keep in mind that positive cash flow is when you buy and not when you sell. This means that in technical terms, if you take out a home loan to own a home as an asset, but it causes a negative monthly cash flow, it is actually a liability. Therefore, if you want to make money from renting out properties, make sure you actually experience positive cash flow at the time of purchasing the property with the home loan. What does this look like?
Rental income - mortgage fees = positive amount
What are the different types of home loans?
There are two basic types of home loans and many subsequent types offered by banks and financial institutions. The two home loans below are used by them to make offerings unique to their brand by offering home loan products that have different options around these two types, like giving a capped interest rate option.
Variable interest rate home loan
With this loan you will be given a personalized interest rate that is attached to the South African repo rate.
Fixed interest rate home loan
You are usually given a choice between a fixed interest rate and a variable interest rate. A fixed interest rate can be a great idea if it looks like the country is facing economic downturn for a long time. But its risk is that you might pay a higher interest rate than necessary because the economy takes a turn for the great, and also because the financial institution makes an offering higher than the current rate to cover their own risks.
In the above comparisons you can choose a home loan that suits your personal needs. Please keep in mind that Fincheck uses available information to give a universal comparison. Visit the product page of a home loan that you are interested in and view its benefits, features and any other information that you need. Alternatively, you can view the product guides we have on the above home loan products.