By Chantalle Bell from Engel & Völkers Southern Africa (Pty) Ltd
Banks and mortgage companies understand that purchasing a home is an important investment, whether you’re a first-time buyer, or buying your second or third home. A mortgage is simply a loan that is secured on immovable property, normally your home. The mortgage is lent to you in a lump sum to pay for the property, which needs to be paid back over a period of time.
There are certain things that you should know about the loan application process before you apply for one, the actual process and financials required are often not known. We have a look at the options available to you and answer some important questions that could help you once you decide to search for a new home.
Type of Mortgage options
- Variable Home Loan – this type of home loan is very popular among new homeowners, the interest rate is attached to the prime loan rate, if the prime loan base rate goes down by 1%, the interest rate follows, but unfortunately, it also works the other way around.
- Capped Rate Home Loan – the criteria is very strict and hard to meet, it’s seldom available with a maximum rate built into the loan. When interest rates go down, you enjoy the benefits, and when interest rates go up, you are not affected since you are only required to pay the agreed capped rate.
- First Time Buyers Home Loan – this is an opportunity for people who would like to invest in a home but may not have the required amount to deposit on it. Banks are now open to lending more than 100% of the purchase price, which includes registration and transfer costs. This works best for people who have never applied for any home loan or never owned any property.
- Fixed Rate Home Loan – has a fixed interest for a certain period, which covers one or two years. The fixed rate would always be higher than the base home rate but will protect you from increasing rates. This will free your mind from potential increasing interest rates since you already know what your repayments are. While this may be good, it will also be a disadvantage once the interest rate drops, since you will still be paying the same interest rate.
- Reducing or Step Down Home Loan – here there will be a guaranteed small interest rate decrease every six months for an agreed period. Even when the home loan interest rate rises or falls, the gradual reduction would still apply.
Benefits of using a Bond Originator
- You only need to complete one application, which will be submitted to all the major banks by your Bond Originator. After your approvals are received it’s up to you to decide which bank you wish to go with.
- The Originator knows exactly what is needed and will collect all the necessary documentation and setup your application to ensure the process is a smooth one.
- Bond Originators have a strong relationship with all the major banks, therefore, they are able to negotiate a lower rate on your bond, as the banks will be competing for your business.
- The best feature of the Bond Origination industry is that the service offered is totally free. The bank pays the originator and these costs are not passed onto the client.
Steps in the Bond registration process
Step 1 – The Bond Attorneys (appointed by the bank registering the bond) request the draft deed and guarantee requirements from the Transfer Attorney (appointed by the Seller to transfer the property to the Buyer’s name) who obtains this from the Cancellation Attorney (appointed by the bank cancelling the Seller’s bond). This information is forwarded to the Bond Attorneys to draft bond documents. The same attorney could be appointed to do all.
Step 2 – The Transfer documents are signed by the Buyer & Seller.
Step 3 – The Buyer pays transfer costs and the Transfer Attorney pays the rates & taxes, which allows them to obtain a rates clearance certificate. The Transfer Attorney also pays the Transfer Duty. Both of these are legal requirements for registration to take place.
Step 4 – Bond documents are drafted, signed by the Buyer and the guarantees are forwarded to the Transfer Attorneys, who in turn forwards the guarantees to the Cancellation Attorneys to obtain consent for cancellation from the Seller’s bank.
Step 5 – The Buyer pays the bond costs to the Bond Attorneys.
Step 6 – Once all documents have been signed and the costs paid, the Transfer, Bond & Cancellation Attorneys arrange for simultaneous lodgement of the documents.
Step 7 – Once lodged, the deeds office takes approximately 7 – 10 working days to process the documents before registration takes place.
Step 8 – Payment of the guarantees is made on the date of registration of the bond. The registration process typically takes between 8 and 12 weeks to complete. However, delays are possible if some information is not provided.
What is Pre-approval?
A Bond Originator can be contacted to get you pre-qualified for a home loan even before you have started the house hunting process. They will take you through the pre-qualification process where you will need to submit supporting documents for a credit check and financial assessment which will need to be done. Once that is completed they will issue you with a pre-qualification certificate that is valid for 3 months. Now that you know what you can afford you can start your search.
What other costs are there associated with Mortgages?
Whenever you buy a house valued at over R900 000 fees are payable to the South African Revenue Service (SARS). It is calculated as a percentage of the purchase price and varies depending on the purchaser’s legal status. The transfer duty is paid by the purchaser of the property prior to registration of transfer, or within six months after signing the agreement. There is a penalty fee for late payment of 10% per annum for each completed month after due date is levied.
Bond registration costs
The attorney registering your bond charges fees. They receive an instruction from the bank that has approved your home loan, draw up the paperwork, do FICA checks and lodge at the Deeds office. These attorneys should be in touch with you within a week of your mortgage being approved. They will ask you to come into their offices to sign the necessary documents. The fees are charged on a sliding scale, and your mortgage originator will be able to inform you how much these will be.
The conveyancing attorney is appointed by the seller, but paid for by the buyer. After the introduction of the National Credit Act the banks no longer charge a valuation fee but have included it in their increased ‘initiation fee’ . These fees are on a sliding scale that your Originator can help you with.
Bank’s initiation fees
Under the National Credit Act banks are allowed to charge up to R5,700 for their initiation fees. These vary from lender to lender but expect to pay at least R3,500 and no more than R5,700.
Ways to pay off your bond ahead of time
- Refinance your home loan from a standard 20-year term to a 10-year bond. If you refinance to a 10-year home loan, you’ll typically pay a lower interest rate while making larger payments each month. Since your term is so much shorter and the interest rate is likely much lower, you will have a considerable saving on your interest costs.
- Paying extra into your bond – consistently adding just R1 000 to your monthly bond payment can make a big difference, if interest rates stay the same, you could pay off your bond more than three years earlier, and save in interest, compared with having a bond for 20 years.
- Use salary increases on your bond – one way to find extra cash to put toward your home loan is to use your salary increases. The goal is to put the same percentage of your income toward your bond, even when your pay goes up, if you’re currently putting 15% of your income towards your bond payment, 15% of each annual increase amount should also go towards your bond, in addition to what you’re already paying.
- Use cash windfalls to pay lump sums – instead of paying a little extra each month, you could pay a large lump sum here and there, such as from an annual tax refund, 13th cheque or bonus, or inheritance.