How to … finance the purchase of a property
Most people apply to the bank for finance to buy a home – this type of loan is known as a home loan or mortgage bond and, relative to other loans, has a low interest rate.
Since the National Credit Act (NCA) was introduced in June 2007, the process of applying for a home loan has changed. You are required to provide the bank with the following documents and information: ◆ Identity document; ◆ Salary slip; ◆ Bank statements for the three months prior to application;
◆ Proof of your residential address as required by the Financial Intelligence Centre Act (Fica);
◆ Full details of your expenses – joint expenses and joint income if you are married.
When you apply for a home loan, you can either apply directly to the bank yourself or you can use a bond originator. Bond originators will take the documents and information supplied by you and will approach all the major banks on your behalf. They will then tell you which banks have been approached on your behalf and what interest rate each one has offered you.
According to the NCA, the maximum interest rate that can be charged on home loans is calculated by multiplying the repo rate by 2.2 and adding five percentage points. This works out to 20.4 percent at the current repo rate of seven percent.
Sometimes bond originators will try to steer you towards a certain bank because they get a higher commission with that particular bank. For this reason, it can sometimes be worth your while to follow up with the banks yourself after you have had feedback from the bond originator. Unlike financial intermediaries, bond originators have no obligation to disclose their commission to you. AFFORDABILITY TEST In terms of the NCA, the bank, as a potential creditor, has the responsibility to assess your financial situation by doing an affordability test to determine whether you are able to afford the home loan repayments, taking into account your existing financial commitments.
If you later default on a home loan and it can be proved that you were not able to afford the loan when it was granted to you, the bank can be found guilty of “reckless lending”. If this is the case, the bank concerned may be prevented by law from repossessing the property.
Also, a decline in real household income, deteriorating disposable income and a decline in house prices has made banks more wary about who they lend money to and on what terms.
For these reasons, getting a home loan has become a lot more difficult than it once was.
Besides the banks, you can also approach non-bank specialist lenders such as Integer and SA Homeloans. However, make sure that you understand the terms and conditions of any finance agreement you sign. CREDIT CHECK When you apply for a home loan, the bank will look at your credit profile as well as your credit record.
Your credit profile is stored on a national database, available to all the banks, showing how much credit you have at your disposal – for example, what your credit limit is for your various credit and store cards. The bank is then able to use that data, together with your income and expenses, to assess whether you can afford to take on any more debt.
Your credit record is stored by the credit bureaus and reflects what type of credit customer you are. For example, if you are always a few days late with your debt repayments, you can be recorded as a “slow payer”, even though you have not actually missed any payments. Similarly, your credit record will show if you have any judgments against you or if you have been blacklisted.
If you default on a credit repayment and are blacklisted by the credit bureaus, the blacklisting remains in place for five years – this means that in that five-year period, you will not be able to qualify for any credit, including a home loan. THE COSTS OF BUYING A HOME When you buy a home, there are several costs you have to pay.
In most cases, to qualify for a home loan you will have to put down a deposit of between five and 20 percent, depending on the value of the home, the credit risk you pose and which bank you use. If you are buying vacant land, this deposit requirement can go as high as 40 percent of the purchase price.
You also have to pay to have the property transferred into your name and to have your bond registered with the bank.
The bond registration and transfer process is handled by specialist property lawyers called conveyancers.
In most cases, the seller appoints the attorney who will transfer the property into your name. The bank that grants you a home loan will appoint the conveyancer who will register your bond. You, the buyer, pay the costs of the transfer and bond registration.