Key considerations before you make your home loan choice

Moving into a new home is a massive milestone especially for first-time buyers. Regardless of the paperwork and various processes involved, the end result will always be a fulfilling one. But before you can bring out your welcome mat and invite guests over for a housewarming party, you will first need to manoeuvre your way through the initial stages of homeownership.

Deciding on how to pay towards your home loan is one of the most important and multi-faceted steps to undertake. This is usually a 3-step process that requires you to:

    • Understand your finances
    • Research home loan options 
    • Decide on a home loan service provider

At this point, your savings towards a deposit should amount to approximately 10 to 15 % of the purchase price for your new home. As a general rule, ensure that you pay the highest amount possible to lower your monthly repayments. 

Once you have a clear understanding of your repayments, it is time to decide on a home loan type that best suits you. Banks and other approved lenders in South Africa offer five different types of home loans. These include a variable home loan, capped rate home loan, first-time buyers home loan, fixed rate home loan and reducing/step down home loan.

Variable Home Loan

The variable home loan is the most popular among new homeowners, and as its name suggests, it offers a variable interest rate which is linked to the prime lending rate. This rate is used as a starting point by banks and other lenders to calculate interest rates for individual home loan applicants. When this rate changes, so does the home loan interest rate. This means that your monthly repayments will either decrease or increase, depending on the movements of the interest rate. Furthermore, this home loan is tailored to your risk profile with a flexible repayment term of up to 20 years. 

Fixed Rate Home Loan

Unlike the variable option, the interest on a fixed rate home loan stays the same for a certain period of time, regardless of the changes in the prime lending rate. It is important to note that the fixed rate will always be 1.5% - 2% higher than the lending rate. Many people opt for this option as it safeguards them against rising interest rates and they can adequately budget for their repayments without any unexpected increases. However, if the interest rate drops, you will still be required to pay the same fixed amount.

Capped Rate Home Loan

A capped home loan requires an applicant to agree on a capped rate that will safeguard them against interest rate increases. This means that their home loan repayments will remain the same amid interest hikes. However, in the event of a rate drop, your repayments will be reduced. Although this sounds like the optimum plan, you will also need to pay a premium for a capped rate, which is debited to your home loan amount. 

First Time Buyers Home Loan

This type of home loan is specifically for first-time home buyers who find it difficult to save up for a deposit. This option is a no-deposit bond, which offers 100% financing. According to South Africa’s biggest bond originator, Ooba, 74% or 3 out of 4 people who apply for this home loan are approved. However, although zero deposit home loans are entirely possible with this option, they do come with many prerequisites. The applicant will need to have a spotless credit score, solid repayment history, stable employment income and a guarantor on the loan. 

Reducing or Step Down Home Loan 

The reducing home loan guarantees small interest rate decreases on your home loan amount every 6 months – 1 year for an agreed period. This gradual reduction will still apply when the prime lending rate increases or falls, and this results in significant savings. As such, reducing home loans are very popular among those reaching retirement as they expect their disposable incomes to reduce considerably after their retirement.

After you’ve decided on the best home loan repayment plan for your requirements, it is time to choose a reputable financial lender. In South Africa, there are various options available including banks, and bond originators such as Ooba, Banksbonds and GPF Mortgage.

Moving into a new home is an achievement many inspire towards. While you’re on your journey to get there, ensure that you save up for deposit, and choose a home loan option and lender that suits you.