Guide to residential home loans

The Home Loan enables you to finance residential property.

The general repayment term is 20 years. However, this can be structured up to a maximum of 30 years. Vacant land, however, is repayable over a maximum of 15 years.


Documentation to accompany your application.

In order to apply for a Home Loan, please send the following documents:
• Your bar-coded ID document
• Latest salary advice
• Offer to purchase
• The original document or a certified copy of one of the following documents verifying your residential address, not more than three months old: Municipal account, lease or rent agreement, Telkom statement, etc.
• Original document or certified copy of a South African Revenue Services document reflecting your personal details and income tax number (where issued).


What are the features of the Product?

• Choose the interest rate option that gives you the repayment structure you prefer – fixed or variable.
• Different repayment methods may be utilised to repay your home loan (for
example debit order, salary deduction, electronic transfers, cash or cheque deposits).
• You can register a larger bond than the amount of the loan granted, which will cut the cost and time when increasing your loan in future (via a Further Advance).
• In certain instances, banks provide finance in excess of the property value. In these cases, the amount exceeding the property value will be maintained on a separate loan account at a higher interest rate.
• You can have electronic access to your home loan via Internet Banking and Telephone Banking.
• The maximum term of your loan is 30 years. The term may be increased/decreased at any time at no additional cost.
• Further Advances: Further loan amounts may be applied for as soon as your property value increases sufficiently or when you want to extend/improve your property.
• Additional deposits can be made at any stage, which will immediately reduce your interest cost.





How does the Product work?

Your home loan is used to finance your residential property, whether it is your existing home or the purchase of another property. A Building Loan is also available to assist you with the building of a new dwelling or enhancing an existing home.
When you purchase another home, a new application for finance will have to be submitted and a new home loan set up.

In all cases, a Mortgage Bond is registered over the property as security for the home loan.

Interest is calculated on the daily outstanding balance and then capitalised/debited monthly on the instalment due day. Instalments must be paid into the loan account on the required instalment due day. Monthly repayments must be met in terms of the mortgage loan agreement. Unless another date is selected, the due day will default to the 1st of the month.


Limitations of the Product.

Only residential properties may be financed with the Home Loan.

Banks calculate the maximum home loan that you can afford based on your monthly home loan repayment not exceeding a calculation of your surplus (discretionary) monthly income.


Pricing structure.

Once the bond has been registered, there are other costs that are debited to the home loan account. These are:
• Initiation fee: This is a once-off fee charged by the bank for processing the application and setting up the home loan.
• Administration fee: This is a monthly administration fee which is added to your monthly instalment.
• Assessment fee: This is a once-off fee charged for performing an assessment on the property.





Interest Rates.

Our range of interest rate options enable you to make the best deal based on your personal circumstances. You have a choice of fixed rates or a variable interest rate.

By selecting the variable rate option, you could qualify for a concession (a rate reduction) based on your income, loan size and the amount of loan relative to the value of the property. The interest rate will then vary with changes to the Mortgage Lending rate.


FICA requirements for opening an account.

• Bar-coded ID document
• The original document or a certified copy of one of the following documents verifying your residential address, not more than three months old: e.g. Utility bill, lease or rental agreement, Telkom statement, etc.
• Original document or certified copy of a South African Revenue Services document, reflecting your personal details and income tax number (if issued).

VARIABLE RATE:


Description of the Product.

The variable interest rate is the conventional fluctuating interest rate, which is based on the bank’s mortgage lending rate as it changes from time to time.


What are the features of the Product?

• Any fluctuations in the bank’s mortgage lending rate would influence this interest rate option.
• You can switch from this rate option to one of the fixed-rate options at any time.


Limitations of the Product.

This rate option cannot be fixed for a pre-determined period.
It will be affected by movements in the bank’s mortgage lending rate.


Related products or alternative Products.

Fixed-interest rate options.


Pricing structure.

You may qualify for a concession on the bank’s mortgage lending rate, based on your income, the loan size and the amount of the loan relative to the value of the property. Any concession will be negotiated with you when we process your application.









FURTHER ADVANCES (INCLUDING RE-ADVANCES):


Description of the Product.


A Further Advance is nothing more than the process to increase your home loan. You have various options available:
1. Increase your loan back to the original loan granted (we call that a readvance) – your existing mortgage bond will cover it – no additional bond to be registered (we recommend that you use FlexiReserve in this instance).
2. Increase your loan up to the current value of your property* (in some cases we will allow up to 10% more than that value).
3. Increase your loan to extend/improve your home* (using the Building Loan option)

*Unless you previously registered a larger bond, this will require registration of an additional bond.

Documentation to accompany your Further Advance application:

In order to apply for a Home Loan, please bring the following documents along:

• Your bar-coded ID document.
• Latest salary advice.
• The original document or a certified copy of one of the following documents verifying your residential address, not more than three months old: Municipal account, lease or rent agreement, Telkom statement, etc.
• Original document or certified copy of a South African Revenue Services document reflecting your personal details and income tax number (where issued).


Documents for Further Advance applications using the Building Loan process:

In addition to the above-mentioned documents:
• Copy of Provisional/Approved Plans.
• Copy of detailed tender/quotations.
• Minimum specifications and schedule of finishes.
• Waiver of Builders Lien.

What are the features of the Product?

• A Further Advance is a cost-effective way to finance other purchases (consolidate your more expensive debt into your home loan).
• Further Advance funds can be used for any purpose, from home improvements, education, to dream holidays.





How does the Product work?

To explain a Further Advance, let's use the example of Customer A below:

Home loan originally granted: R180 000
Original bond amount registered: R180 000
Value of property: R300 000

Customer A needs an amount of R80 000 and wants to increase his home loan and as such applies for a Further Advance. In this case, a higher bond (second bond) of R80 000 would have to be registered (R180 000 bond amount + R80 000 second bond = R260 000 total bond amount.)

Remember when you apply for a Further Advance (normal credit and affordability criteria will apply), Absa will have to do an evaluation on your property to determine the security value. Certain fees such as a valuation fee will be charged.

Further to this, there will also be legal fees applicable to the registration of the second bond.

In order to make the process easier and cheaper, we recommend that when taking out a new loan, a larger bond be registered than needed for that loan. When applying for a subsequent Further Advance, the result is lower legal costs overall and a shorter time before funds are made available.


Limitations of the Product.

A further advance can only be approved where either:
• The property value is sufficient to cover the increased amount, or
• The property value will be increased by the improvements made to the property.

The increased loan will always need to be secured by a mortgage bond of at least the same value.


Pricing structure.

Besides the costs levied by attorneys for attending to the registration of any additional bond, the loan will also be debited with an assessment fee to cover the cost of assessing the property.

The assessment fee for a building loan process is higher, due to the number of assessments required during the building process (See Building Loans).


Interest Rate.

The Further Advance effectively resets your home loan with the bank and the interest rate applicable to the loan will be negotiated with you as part of the process.



HOUSEOWNER'S COMPREHENSIVE INSURANCE (HOC):

With a Home Loan it is compulsory* to have Houseowner’s Comprehensive Insurance (HOC) as it insures the property mortgaged as security for your loan. HOC is short-term insurance cover that protects your home (probably your most valuable asset) against fire, flooding and other disasters. This insurance covers the replacement value of the structure and fixtures of your home but does not cover the contents such as your TV, hi-fi, etc, which you would have to specify and insure separately under a different product (Householder’s Insurance).

HOC covers the immovable property (such as the dwelling, outbuildings, fixtures and fittings, paving, walls, swimming pools, tennis courts, etc.) against damage caused by specific events. These events include damage caused by fire, storm, flood, burst pipes and geysers to name a few. Some insurers offer Subsidence and Landslip cover as well.

*Note: Where the property is a unit in a Sectional Title complex, it is the responsibility of the Body Corporate to arrange this type of insurance on all units, with the premiums added to your monthly levy. Thus HOC is not compulsory on Sectional Title properties.


What are the features of the Product.

Houseowner's Comprehensive Insurance protects your home against unforeseen loss or damage (giving you peace of mind that your home, probably your family's most valuable asset, is protected against unforeseen events).


How does the Product work?

The HOC premium is charged annually in advance and capitalised to your home loan. A portion of this premium (1/12th) is then included in your monthly home loan instalment.


Pricing structure.

The premiums charged by insurers vary. At the "standard" rate applied in the market the annual premium on a home with a replacement value of R250 000 will amount to R600* per annum or approximately R50 per month.

* Please note that these rates are an indication only and are subject to change at any time.

VANIA LEONARD
Bond Consultant

Tel 021 975 3404
Fax 021 413 2023
Mobile 079 485 5355
Email vania.leonard@betterbond.co.za

Seven new rules for the first-time home buyer

NEW YORK TIMES 15-9-2009

Your Money
Seven New Rules for the First-Time Home Buyer


Robert Neubecker

Yes, the financial system almost collapsed because mortgage bankers and brokers told lies about loan terms and loosened standards in dangerous ways, and investment bankers packaged those loans into bonds that were far more toxic than ratings agencies predicted.

But the roots of the mortgage contagion lie with all of us and our desire to own just a bit more house.

So as the one-year anniversary arrives of our near financial collapse, it’s a good time to blow up a long-standing but underexamined maxim of real estate — that you should always stretch financially when buying your first home.

No one is quite sure who came up with this idea, though suspicions rest on real estate agents or kindly parents with the best of intentions who never expected that real estate prices could fall. Whatever its origin, the economists and financial planners I spoke with this week are almost unanimous in their rejection of it.

Here’s how they dismantled the old saw — and a list of seven suggestions they offered up in its place.

START WITH THE BASICS Let’s begin with some other standards, tried and true advice that served banks and borrowers well for years, until they forgot all about them in the race to write more loans and buy bigger houses. Put 20 percent down, so you have less of a chance of owing more than your home is worth if prices fall again. Get a fixed-rate mortgage, so the biggest part of your monthly housing bill remains stable.

If you’re determined to be truly conservative, don’t spend more than about 35 percent of your pretax income on mortgage, property tax and home insurance payments. Bank of America, which adheres to the guidelines that Fannie Mae and Freddie Mac set, will let your total debt (including student and other loans) hit 45 percent of your pretax income, but no more.

That said, if you end up with an adjustable-rate loan, banks may not be concerned with whether you’ll be able to afford the maximum possible payment when the interest rate adjusts in five or seven years. But you should be worried about it.

CONSIDER YOUR INCOME The best case for stretching for a first house is that first-time home buyers in their 20s and 30s will probably see their incomes grow more quickly than older people buying their second or third home.

Harvey S. Rosen, a Princeton economics professor, finds in a forthcoming Journal of Finance article that he co-wrote with two Federal Reserve Bank economists, Kristopher Gerardi and Paul S. Willen, that the size of a house that someone buys tends to be a good indicator of what their income will be later. “People can, on average, make reasonably good predictions of their future incomes and act on them in sensible ways by buying bigger houses,” Mr. Rosen said.

Indeed, much of the mess in the mortgage market has been because of people borrowing money with loans that they didn’t understand — or betting that housing prices would continue to rise enough that they would be able to refinance their loans before the payments rose. Income overconfidence may have had something to do with it (and high unemployment worsened the problems), but it’s probably not the primary cause.

BOW TO UNKNOWNS This research is all well and good as long as you continue to work. But if you’re buying your first home before you have children, you may feel quite differently about work once you become a parent. And if you do, you may not want a mortgage boxing you in to going back to the office three months after the baby is born.

Bobbie D. Munroe, a financial planner with Fraser Financial in Atlanta, encourages younger clients in this situation to model out their budget, including any proposed mortgage, three ways — with both spouses working full time, one working part time and one staying at home for a few years. She also suggests imagining or even practicing living on one income, to see if it’s truly realistic.

“What people should do is ultimately their own decision,” she said. “But they should do it with eyes wide open.”

Even people who don’t want to have children need to consider this. Besides the obvious possibility of sustained unemployment, what about the need to escape a dying industry or an early midlife crisis that necessitates career change to stave off depression? Even government employees and medical residents who believe that their incomes are set for life ought to consider this possibility.

MAP OUT EXPENSES It stands to reason that anyone tempted to stretch for a house will be inclined to play down the expense of maintaining it. These costs are anything but ancillary, though.

For many years, Dennis G. Stearns, a financial planner in Greensboro, N.C., has been alarmed enough by clients’ unrealistic expectations that he’s maintained a home cost spreadsheet that he shares with clients shopping for houses. He also updates it periodically with aggregate, real-world data based on their subsequent experiences.

Mr. Stearns estimates that owners of a newer home that do some work for themselves but contract major work out to others will pay 3.6 percent of the original purchase price annually for maintenance and 4.5 percent if it’s an older home. So if you own a $400,000 home, your costs will probably hit the five figures each year — and may rise with inflation. These expenses will be another 20 percent or so higher if you live in a severe weather area. He does note, however, that the tax benefits of home ownership can offset half or more of these costs in some areas of the country.

BUY BEST (OR CHEAPEST) All of these caveats have given rise to some unusual strategies. Michael Kalscheur, a financial planner with Castle Wealth Advisors in Indianapolis, suggests buying the dream house you covet (if you can afford it) or an inexpensive starter house but not anything in the middle.

“If people have their heart set on something, inevitably, if they can’t afford what they really want, they buy the next best thing,” he said. “That’s absolutely the worst thing you can do. Not only do you not get what you want, but it sucks you dry.”

Why? Well, if you buy that entry-level home instead of the silver-medal home, you can save a lot more money each month after making the house payment (as long as you’re disciplined) than you would if you were paying a big mortgage toward that next best house. And all of your other housing costs will be lower, too. Then, several years later, you’re in a much better position to buy what you actually want.

STRETCH THE HOUSE Better yet, keep in mind that you don’t ever have to move from that first home — and incur all of the transaction costs associated with selling and buying and moving again.

J. Michael Collins, an assistant professor in the department of consumer science at University of Wisconsin’s School of Human Ecology in Madison, suggests paying less for a home that you can upgrade periodically when your income is stable and your savings or available credit make it possible.

In other words, stretching out your tenure in a home (and the physical boundaries of the home itself) may make more sense than stretching for each successive mortgage in a series of two or more houses.

THE EIGHT-HOUR RULE One rule about all of these rules is that it’s unlikely that every one will apply to every circumstance. Individuals and their income streams are too varied, and real estate markets are themselves unique.

When all else fails, however, you can always fall back on the eight-hour test. Whatever the size of your mortgage, you have to be able to sleep soundly at night. So if an impending loan has you stretching for the Ambien, it’s a pretty good sign that the loan is a bit of a stretch as well.