Buying a new home has just become a great deal cheaper. In February, Minister of Finance Trevor Manuel announced that all homes under R500 000 will attract no transfer duty. This is a saving of up to R17 000. At the same time, the banks have become far more aggressive in offering better rates for home loans — you just need to shop around to find the right package.
Affordability
According to Ben Stander, product manager at Old Mutual Bank, a bank will generally be prepared to lend you an amount based on a 30% instalment:income ratio. If you earn R10 000 a month for example, you could borrow enough to pay back about R3 000 a month. This means you would qualify for a loan of around R300 000. The current prime interest rate is 10,5%.
Depending on your credit record, you could qualify for a better home loan rate. While banks use this as a rule of thumb, only you know your real budget constraints and you need to work out your own budget and make sure that you can afford the repayments. You also need to remember that there are additional costs involved when buying a home, such as legal (conveyance) fees and bond registration costs.
If you purchase a house for more than R500 000, you will also incur transfer duty costs. There are also deposits that need to be paid for water and electricity. Make sure you are fully aware of all these upfront costs when working out how much you can afford.
Starter home loans
Most banks offer starter home loans to first time buyers. Until recently, banks usually required a deposit when customers wanted to buy a new home. Nowadays, banks are prepared to lend up to 110% of the value of the purchase price to assist with additional expenses, such as transfer duty and registration costs which include legal fees.
For example, Absa has introduced a home loan package called MyHome. MyHome gives individuals or couples with joint monthly incomes of between R1 500 and R7 500 access to an affordable, 100% mortgage bond that can also include a five-year fixed-rate option. This means that your interest rate is fixed and there will be no nasty surprises should interest rates go up. In addition to offering clients 100% bonds, an additional 10% is also included to cover transfer duty, bank fees and registration costs.
In a market of hot competition and banks all wanting a piece of the action, Absa has also reduced their legal fees to new MyHome clients by 50%. Recently, they introduced a novel incentive to help with furnishing your new home. They have entered into an agreement with the JD Group and new homeowners will be given vouchers that entitle them to discounts on purchases at retail stores owned by the JD Group — Joshua Doore, Morkels, Bradlows, Russels, Price and Pride and Barnetts.
First National Bank has introduced a home loan product specifically for government school teachers. The home loan is called Smart Bond and is for home loans between R20 000 to R240 000. You qualify if you earn R10 000 a month or less. Smart Bond also offers a re-advance or further advance facility. Through this facility you are able to borrow additional funds from your home loan for renovations or other expenses. How much you can borrow is based on how much of your capital you have repaid. FNB also offer a Smart Bond Building loan if you are planning to build your own home.
Shop around
While all of the banks offer starter home loans with a couple of bells and whistles, it is still worth it to phone around and find the best interest rate. The banks want your business and are prepared to try and beat the other banks by offering you a better interest rate. By negotiating even a 0,5% lower rate, over a 20-year period — the standard length of a home loan — this could save you R20 000.
Mortgage originators such as MortgageSA or BetterBonds take the hassle out of phoning all the banks and they handle the administration and make the application to the various banks on your behalf. They will let you know which bank is offering you the best deal. This service does not cost you any extra as the banks pay the mortgage originators fees.
Your existing home loan
If you already own a home, it is still worth making sure you are getting the best rate in town. Firstly, banks have become more aggressive in offering lower rates in the past few years, so it is worth reviewing your interest rate, which may have been set several years ago.
Secondly, with property prices increasing so rapidly over the past few years, your bond as a percentage of your property value may have fallen significantly. This means that your risk profile has improved and you could qualify for a better home loan rate.
Finally, as your salary has increased, your home loan repayments have remained fixed. Again, this means that your risk profile has improved and you could qualify for a better rate.
With property prices rising, many people find that it is cheaper to renovate and add an additional room on to their house rather than buy a new home. If, when reviewing your mortgage rate, you qualify for a bigger home loan, you could borrow additional money to pay for your renovations. But you need to be aware that there are costs involved in re-registering your bond and you need to make sure that you take those costs into consideration.
Like bond originators which assist you in finding the best rate when you purchase a home, mortgage brokers BondBusters specialise in negotiating with the banks to improve your current mortgage rate.