Bonds and home loans

Applying for a bond

Unless you are in the fortunate position to be able to buy a property outright, you are most likely going to have to apply for a home loan from a financial institution.
All banks offer standard bond rates, namely, the cost of your home divided over repayment period (anything up to 20 years) with interest, (the rate of which depends on what you negotiate with the bank when they accept your application).
There are different bond options offered by the different banks and it is best to “shop around” to find a bond option that will best suit your needs. Most banks do not offer mortgages for amounts less than R100 000 and If you are buying for the first time you may get a loan for more than 100% of the cost of the property to cover other costs that may be involved.

In order to apply for a bond you will need:

• A valid identity document.
• A recent utility bill (for FICA purposes).
• Your tax number (if applicable).
• At least three months recent bank statements.
• A letter of employment and a recent pay slip.

If you are self employed you will need:

• A valid identity document.
• A recent utility bill (for FICA purposes).
• Tax return statements of monies owed.
• A letter from your accountant stating annual gross profit and earnings over the last year.
• An audited record of your income and expense statements.
• At least three months recent bank statements.

Getting the best interest rate

There are several factors taken into consideration when determining the rate at which a bank will offer a home loan to someone. In short, the lower the risk of lending to an individual, the better the rate that will be offered, (it is a competitive business after all).
In calculating its risk, the bank will consider factors such as:

• The ratio between the size of your loan and the assessed value of your property. - Banks will send a valuer to your home to assess its value before any loan is granted. The risk is less, the smaller the loan is in comparison to the value of the property
• The ratio between the bond payment amount and the buyer’s total income. - Banks will not grant a home loan with repayments in excess of 30% of your income.
• Home loan size. – Better rates are generally offered on higher bond amounts.
• The length of time for repayment. – A shorter term of repayment will be less likely to be discounted as it will be less profitable for the bank.
• Your credit history. An individual with a good credit record is less of a risk than someone who has a bad history of repayments or no history at all.
• The type of bond applied for. Certain bonds have built in facilities to help pay for the cost of educating your children or buying a new car. Different banks have different options available.

It is always best to “shop around” and speak to various banks to ensure you find the package that will most suit your situation. The easiest way to do this is by making use of the services of a bond originator who will do all the legwork on your behalf and can advise you on the options that are available to you.

Bond Originators

Bond originators specialise in finding the best deal for their customers by “shopping around” at the different financial institutions. The benefits of using the services of a mortgage originator when applying for a bond on a property are straightforward:

Most notably they handle all the tedious paperwork needed to apply to several financial institutions. You simply fill out one form and they complete the bond applications to at least four banks on your behalf. This not only saves you time but also ensures that all the correct information is included where necessary.

Because bond originators maintain good relationships with the various banks and mortgage providers, they are in a position to negotiate a lower interest rate for your loan. This can potentially save you thousands over the term of the bond.

The bond origination industry offers a service that is totally free. Bond origination companies are paid by the banks and these costs should never be passed on to the client.

The governing body for bond originators is the National Association of Mortgage Lenders (NAMO) and members are expected to adhere to a code of conduct. Membership of this organization is currently voluntary so it is within your interests to make sure that any bond originators you deal with are NAMO members so that you can trust that the service provided by these companies will be efficient, professional and above board.

Fixed interest rates

There are always varying opinions on whether the interest rate will increase or decrease with many factors involved. The general rule is that you should choose a fixed rate option if you are expecting an interest rate increase in the near future. Buyers should look seriously at their budgets to ensure that they will be able to afford the repayments if rates rise 2% to 3%. If rates begin to decrease however, your fixed rate could mean you’ll be paying more interest than someone with a variable rate option where a difference of 1% could mean hundreds of thousands of Rands.

The major deciding factor is that fixed interest rates provide peace of mind with regard bond repayments. With a fixed rate you are able to budget your expenses more effectively, secure in the knowledge that your monthly repayment won’t shoot up suddenly due to an increase in the interest rate.

Cutting down monthly repayments

The general rule is that the more equity you have in a property, the smaller your monthly loan repayments will be. By Paying in even small amounts over and above your normal repayment you can shave years off the term of your loan and more importantly reduce the amount of interest payable. It is in your best interests therefore to put any surplus funds you may have available into your bond.