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Tuesday Feb 05, 2013

Bonds 101: Everything the first-time buyer needs to know

Peter and Aisha are thinking about starting a family. They've been renting a two bedroom flat together since they got married five years ago but Aisha has just been promoted and her parents are urging the couple to invest in a home of their own rather than "pay off someone else's bond".

When it comes to bonds, however, as first-time property buyers Peter and Aisha have no experience and very little knowledge of what applying for a mortgage entails.

What can I afford?

Mortgage originator ooba points out that, naturally, the very first thing a first-time buyer needs to consider is what they can afford. There are plenty of online calculators to help you work out how much you can afford to spend on bond repayments every month. Also, take into account what is known as the loan-to-value ratio. It will affect the size of the bond a lender is willing to give you.

It's a figure calculated by comparing the value of the property you want to purchase with the size of the loan you're applying for. You calculate this by dividing the amount of the mortgage by the value of the property and then multiplying that number by 100.

Are there any other costs I should be aware of?

Yes. Besides the monthly bond repayments you will need to make once you have been granted a bond, you will also need to pay a bond initiation fee and administration fees. Other costs the new homeowner needs to consider are transfer costs, removal costs, insurance and utility bills and rates and taxes. Many people are unaware that transfer payments fall under two entities. Transfer costs are the legal costs you need to pay when buying a home and transfer duty is a form of tax payable to SARS before transfer documents are lodged in the deeds office. "A good estate agent," says Liz Makelberge, co-owner of Lew Geffen Sotheby's International Realty Blouberg and surrounds, "will help you work out these costs so that you have a realistic picture of the actual costs of buying your first home before you apply for a bond."

What do I need to qualify for a bond?

This varies from lender to lender. Most importantly, however, says Makelberge, you need to make sure you have a good credit rating. South Africans are entitled to one free credit check a year. This will let you know if you have any judgements against your name so that, if you do, you can start planning to amend them before applying for your bond. It pays to start improving your credit before applying for a mortgage, too, as a good credit record is the only way you can assure the bank that you pay credit in full and on time.

Depending on the economic climate, even first-time buyers may not be guaranteed a 100% bond. Either way, a deposit gives a lending institution faith in your financial situation and also lowers the amount of interest you will need to pay on the amount once it is approved.

What is pre-qualification?

Before putting in an offer to purchase you need to get yourself pre-qualified for a bond. "An offer to purchase," explains [estate agent], "contains all the terms on which you and the seller agree, including date of occupation, conditions of sale, and fixtures and fittings."

The bond pre-approval process will ensure that, should an offer to purchase be accepted, you can afford the monthly repayments on the amount borrowed. A pre-qualification is valid for 90 days.

What supporting documentation will I need to apply for a bond?

Ooba lists the following documentation you will need when applying for a bond:

  • A copy of your ID document
  • A copy of the offer to purchase containing the seller's and purchaser's details (not necessary for a pre-approval)
  • Proof of income
  • You will need to produce a salary slip (not older than 2 months) or a letter from your employer with a breakdown of your salary and deductions
  • If you are self-employed then you will need a letter from an accounting officer confirming your income, or a statement of assets and liabilities
  • Six months worth of bank statements

    Should I apply for a bond through a bank or a mortgage originator?

    Mortgage originators are the "middlemen" between estate agents and banks. They examine banks' offerings, trying to find the best deal for the homeowner. They also assist in filling in forms and applications that are sent to banks. Some believe that going directly to a bank, rather, offers better value as there is a direct relationship between the lender and the institution. The decision, ultimately, is a personal one. The home buyer should never feel afraid to shop around until they find the best deal.

    What happens if I can't pay off my bond?

    Pay what you can. Don't ever stop paying off your bond. If the lender sees that you are making an effort, they are more likely to be understanding. A debt counsellor will advise you on managing your debt and could prevent you from losing your home. It's vital that you act sooner than later, however, as debt can quickly spiral out of control. Visit the National Credit Regulator to put you in touch with a debt counsellor:

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