There's something special about owning a house of your own. You get to make amazing memories with friends and family - including the furry ones! You don't need to ask the landlord's permission to hammer a nail into the wall, or paint the kitchen a different colour.
The downside? It's one of the most expensive things you'll likely ever have to buy. However, buying property is a worthwhile investment. It’s a big decision, which is why we want to talk about how home loans or bonds work. The more you know, the better prepared you can be for undertaking the process of purchasing a house.
Where do I start?
One of the first things any aspiring homeowner needs to do is figure out:
- How much you can afford to pay
- How much a bank is prepared to loan you
There are numerous easy-to-use bond calculators that show you just how much your monthly premiums will be over a 20- or 30-year period.
Pre-approved bonds save time
Getting pre-approval from the bank before venturing out into the property market is one way of curbing any disappointments. Armed with a loan amount that you could qualify for helps refine your choices. Just remember that a pre-approval isn’t a guarantee, but rather a guide.
Once you've found your dream home - or something close enough to it - and you've signed the offer to purchase, it's time to officially apply for the home loan.
How does a home loan work?
A home loan or bond, is a loan that a bank is willing to make to you over a long term (20 or 30 years). In return, the bank gets to charge you interest on the amount loaned and holds your property as collateral in case you can't make your monthly payments.
Watch out for interest
The interest rate will generally vary over the lifespan of your home loan, but the bottom line is that you’ll be paying a significant amount in terms of interest. Let's take a closer look:
- Sibs has made an offer on a R1 000 000 house.
- She puts down a deposit of R50 000.
- The bank approves her loan, taken over a period of 20 years, at an interest rate of 10.5%.
- At the end of the 20 year period, Sibs will have paid a total of R2 276 306 for her home, of which R1 326 306 would’ve been interest alone.
What is home loan or bond cover? Do I need it?
Home loan or bond insurance is insurance that will typically settle your outstanding bond amount or cover monthly repayments should anything happen to you, i.e. you die, become disabled, or are diagnosed with a severe illness. It gives you peace of mind in the event that if something happens to you, your family won’t lose their home.
Is bond insurance compulsory?
It’s not. However, most, if not all, banks need some form of surety when providing a mortgage bond loan. This can take the form of bond insurance or a life insurance policy. For more information, speak to a certified financial adviser.
Do your research
Investing requires a bit of effort on your part. Property is no exception. Do your research and remember to look out for the 'hidden' costs such as municipal rates, home insurance, and maintenance. Factor these into your monthly budget so that you don't get caught unawares.
Interest, hidden costs, paperwork… it’s enough to put you off buying for a while, isn’t it? There’s an upside though. Despite the numerous ups and downs along the way, property tends to increase in value over time. If Sibs bought at the right time and in the right place, her home will most likely be worth much more than R2.2m in far less than 20 years. Now that’s worth putting out the welcome mat for!
Want to know more before taking the step towards buying property for the first time? Our financial advisers are here to help with information about managing your finances and insurance. Chat to our financial advisers today to get expert guidance tailored to your goals and finances.