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A Quick Introduction to Home Loans / Mortgages / Bonds

1. How do I finance a home purchase?
Few can afford to pay the whole purchase price of a home in cash. But if they can raise 10% or more of the purchase price in cash or from a housing subsidy source, have a good credit record and enough disposable income to cover the monthly repayments, they should be able to obtain a home loan for the balance.

2. What is a mortgage bond?
When a lending institution such as a bank lends a large sum of money to enable someone to buy a property, it requires some form of security. In most cases, the property itself is the bank’s security and the mortgage bond is the legal instrument that gives the bank the right to that security.
The security is effected when the bond is endorsed on the title deed of the property and registered at the Deeds Office, and it means that the property owner cannot transfer ownership without the permission of the bondholder (the bank). And the bondholder will of course not agree to the cancellation of the bond to allow transfer until the amount outstanding on the home loan has been repaid.
Thus the amount due to the lender is secured though the bond, which is why it is common to talk of bond instalments instead of home loan instalments, or changes in the bond rate instead of the home loan interest rate.

3. How do I get a home loan?
Once a homebuyer has signed an offer to purchase, there is usually only a limited time available to secure a home loan, and the quickest and most effective way to do so is usually through a mortgage originator.
Good originators will have at their fingertips all the latest information about the home loan packages being offered by the various banks, and will be able to advise buyers as to which options might most closely match their financial profile.
And just as importantly, a good originator will be able to submit the buyer’s home loan application to several lenders at the same time, so that the buyer can quickly compare the responses and see which bank is offering the best interest rate and the best overall loan package.
Mortgage originators get paid by the banks for bringing in new home loan business so their service is free to homebuyers.

4. What do the banks require before they will grant a home loan?
Before granting a home loan for the purchase of a property, a bank will review several factors. These include:
  • The credit record of the potential homebuyer, to see if he or she is in the habit of paying their bills on time and whether there are any judgments for bad debt outstanding.
  • The employment prospects and disposable (after deductions) income of the potential homebuyer, to establish whether he or she will be able to afford the home loan instalments on top of other existing commitments such as car repayments, school fees and living expenses. The National Credit Act requires lenders to be very careful when granting any type of loan to ensure that the borrower will not become over-indebted.
  • The market value of the property, to ensure that there will be sufficient security for the loan the potential buyer has requested. The bank would obviously like the property to be worth more than the loan amount at the outset, and projected to grow over time. This is why it is much more difficult to get a loan in any area where values are static or have been declining – even if the potential buyer has a great credit record and a high disposable income.
  • The availability of a deposit. Banks always prefer it if a potential homebuyer can put down a 10 or 20 percent deposit because it shows that the buyer is serious enough about the purchase to commit some of his or her own money. A deposit also ensures a good loan to value (LTV) ratio – that is, that there will be considerably more value in the property than the amount loaned by the bank.

5. How do I pay off a home loan?
Once the property has been transferred into the buyer’s name, he or she will be required to pay monthly instalments to the bank, which will generally vary when interest rates fluctuate. These instalments usually consist of a small amount that goes towards the repayment of the capital amount of the loan, and a larger amount that is interest on the loan. Banks usually insist that the monthly instalment is paid by debit order.

6. Can I speed up the repayment of the loan?
The average loan lifespan is 20 to 30 years but you can shorten that time considerably by paying just a little extra on the instalment each month and stipulating that it should be deducted from the capital portion of the loan. The faster the capital portion shrinks, the lower the interest charge each month, leaving more and more of the instalment available to further lower the capital and so on.
The practice of paying more than the minimum instalment every month can also save you a very large amount of money. If you reduce your loan lifespan to 15 years instead of 20, for example, you will save five year’s worth of monthly repayments. You can use a mortgage calculator to work out the specific savings using your own loan amount, interest rate and extra payment figures.

7. Can I use my home loan to pay off other debt (debt consolidation)?
If you have paid off an amount of your original home loan and you have a revolving credit type loan such as an access bond, you may be able to re-access some of the amount you have paid off to settle other debts (e.g. vehicle finance), for example, or to pay university fees for your children or put down a deposit on another property.
The rationale for 'debt consolidation' is that the interest rate charged against your home loan would usually be less than that for other loans, so the total monthly repayments across all loans would be reduced.
It is not advisable to use your home loan to pay off short-term debt such as credit card balances or a car loan unless you then add the amount you were paying off that debt to your monthly home loan instalment. You should take advice from your bank or financial planner before you make any decisions to use any of the equity you have built up in your home.
The information contained in this document does not constitute financial advice and the use thereof is solely at the indivdual's own risk.

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