‘Or­di­nary’ home loans vs build­ing ‘loans’

George Herald - Private Property - - Property News -

Buy­ing prop­erty is a trans­ac­tion that not many peo­ple can make with­out se­cur­ing a loan with a bank. In most cases, the loan you will need is what the banks call an "or­di­nary" loan, but there is also such a thing as a "build­ing loan", and buy­ers need to know the dif­fer­ence. So says David Britz, mar­ket­ing di­rec­tor of lead­ing home de­vel­oper Multi Spec­trum Prop­er­ties.

Or­di­nary Loan

Whether you are buy­ing a pre-owned prop­erty or a newly built home, an "or­di­nary loan" is what you will need, and in most cases you will only have about 30 days to con­firm to the prop­erty seller that your loan has been ap­proved, says Britz.

It also does not mat­ter if you are a first-time buyer or a re­peat buyer; the size of the loan will de­pend on the prop­erty pur­chase price and the size of the de­posit you are able to put down, and the re­pay­ment pe­riod will most likely be 20 years, al­though some banks are will­ing to ex­tend this to 30 years.

"In terms of the Na­tional Credit Act, banks can­not let you get into fi­nan­cial trou­ble by bor­row­ing more than you can af­ford, but it is a good idea to es­tab­lish the size of loan you are likely to be granted by ob­tain­ing pre-qual­i­fi­ca­tion through a rep­utable bond orig­i­na­tor be­fore you go house-hunt­ing," he says. "This will en­able you to con­cen­trate on prop­er­ties that are in your price range - and speed up your home loan ap­pli­ca­tion process once you have found a home you wish to buy. For pre-qual­i­fi­ca­tion you will need three months' bank state­ments and salary slips, a copy of your ID and proof of res­i­dence, and should ex­pect to have your credit record checked. To ap­ply for a loan, you will also need a copy of the of­fer to pur­chase."

Or­di­nary loans are avail­able in a cou­ple of vari­ants, the first of which is a vari­able-rate loan where the in­ter­est you are charged fluc­tu­ates in line with the prime rate and is thus af­fected by macro-eco­nomic fac­tors like the in­fla­tion rate, the rand ex­change rate and the petrol price, he says. "The sec­ond op­tion is a fixed-rate loan where the in­ter­est you are charged each month is fixed for a cer­tain pe­riod - usu­ally for two years. The ad­van­tage of this type of loan is that it en­ables you to bud­get with cer­tainty, but the big dis­ad­van­tage is that the in­ter­est rate charged will be higher than what­ever prime was at the time it was taken out, and you will get no ben­e­fit if rates should de­cline in the mean­while." In all in­stances, says Britz, the in­ter­est on or­di­nary loans is cal­cu­lated daily on the out­stand­ing bal­ance and deb­ited to your home loan ac­count monthly. In­stal­ments are payable monthly on the due date in terms of your home loan agree­ment with the bank.

Build­ing loan

"How­ever, when you de­cide to buy a plotand-plan home, build your dream res­i­dence or make al­ter­ations to your ex­ist­ing home, you will need a dif­fer­ent type of home loan, usu­ally re­ferred to as a 'build­ing' loan, al­though it also cov­ers the pur­chase of the stand," he says. "And the way a build­ing loan works is that progress pay­ments are only made to the build­ing con­trac­tor as each stage of the con­struc­tion work is sat­is­fac­to­rily com­pleted. Most banks will also re­tain a fi­nal pay­ment un­til you have signed off on the com­pleted prop­erty." To ap­ply for a build­ing loan, he says, you will need all the same doc­u­ments re­quired for an or­di­nary loan, plus ap­proved build­ing and site plans; a de­tailed build­ing con­tract and sched­ule of fin­ishes from your builder; proof that the builder is reg­is­tered with the NHBRC; an all-risks in­sur­ance pol­icy for the con­struc­tion and a waiver of builder's lien in favour of the bank.

"In some cases, bor­row­ers will also need to pay a de­posit of at least 10% of the cost of the build to fi­nance any short­fall be­tween the loan granted by the bank and the even­tual cost of the com­pleted home."

Is­sued by Multi Spec­trum Prop­er­ties

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