How to Apply for a Home Loan

Essential and useful information

The article mainly focuses on first-time home buyers in South Africa and only on individuals as such.

What is a home loan?

A home loan is the money a loan provider, such as a licenced bank, is lending to a home buyer.

Most often, borrowing money to buy a home is the biggest financial commitment an individual will undertake.

What is a building loan?

A building loan is money borrowed to build a house. (The focus of the article is also not on this type of loan.)

Is there a difference between a home loan and a mortgage bond?

It is often mistakenly assumed that a home loan and a mortgage bond are one and the same. They are certainly not.

A mortgage bond also referred to as a mortgage loan, is a legal agreement (called the mortgage bond agreement) by which a home buyer transfers his or her property rights over the home to the loan provider in order to secure the home loan.

Put differently, the mortgage bond agreement stipulates that the home buyer pledges the home as security in order to obtain the home loan. This means that the loan provider (bank) is allowed to repossess the home if the borrower defaults on the home loan.

The mortgage bond and home loan do not have to be of the same amount. However, the mortgage amount cannot be less than the home loan it secures.

The mortgage bond is registered in the Deeds Office against the Title Deed of the property.

Terms related to a mortgage bond

• Collateral: The property (home) pledged as security for repayment of the home loan.

• Title Deed: A legal document that serves as proof of ownership of a home or other type of property.

• Deeds Office: There are 11 deeds offices, called deeds registries, in South Africa. The deeds registries are part of the Deeds Registration branch, an entity of the Department of Rural Development and Land Reform (DRDLR).

It is a place where a title deed is registered in the name of a new house owner, which is one of many functions executed in a deeds office.

• Mortgageable property: The home (property) used as security to obtain a home loan.

• Mortgagee: Is a lender (for example, a bank) who lends money to a buyer.

• Mortgager: Is a borrower who borrows money from a lender in order to buy a home (property).

Terms to be acquainted with when applying for a home loan

It is useful to be acquainted with some key terms related to home loans. Such as:

Bond originator

A bond originator functions as a negotiator between the home loan applicant and the banks, assisting the loan applicant with the application and then submitting it to all the top banks on behalf of the applicant.

Contractual capacity

Contractual capacity refers to an individual’s capacity to enter into contracts (capacity to act) and is part of a person’s capacity to have rights and responsibilities, which is called legal capacity.

In the following situations, individuals do not have contractual capacity:

• Minor (younger than 18 years).
• Mentally disabled.
• A prodigal (a person who wastes money in an irresponsible way and cannot manage his/her affairs – must be guided by a curator).
• Under the influence of alcohol and/or drugs.
• An unrehabilitated insolvent.

Conveyancer

In South Africa, a lawyer also referred to as an attorney, is required to pass the National Conveyancing Examination in order to qualify as a licenced conveyancer.

Only a licenced conveyancer is allowed to perform conveyancing, the legal process of transferring immovable property, and the registration of mortgages.

Fair market value

Adrian Goslett, CEO of RE/MAX of Southern Africa defines fair market value as follows on the website of Private Property:

‘Fair market value is the price that an educated and willing buyer is prepared to pay for a property. This definition assumes that both the buyer and seller are well-informed and that there is no pressure for the transaction to be concluded.’ (Accentuations by the article writer.)

In addition, the property has to be effectively exposed to the property market for a reasonable period of time.

Interest rate

The interest rate is the annual rate charged to a borrower on a loan. Interest, commonly referred to as ‘the cost of money,’ is calculated on the daily balance of the home loan and capitalised monthly.

There are two types of interest rates, namely a variable interest rate and a fixed interest rate.

• Variable interest rate

A variable interest rate is linked to the prime lending rate which is determined by the South African Reserve Bank (SARB).

Depending on adjustments in the prime lending rate, the interest rate on a home loan could increase or decrease, causing the monthly instalment to increase or decrease.

• Fixed interest rate

Home loan providers allow a borrower to negotiate a fixed interest rate, ensuring that the interest rate on the home does not change, which means the same instalment every month.

A fixed interest rate has the advantage that the monthly instalment on a home loan does not increase when the prime lending rate increases. Conversely, a drop in the prime lending rate has no effect on the monthly instalment either.

An applicant’s interest rate is based on his/her risk profile including his/her credit score, market forces, and the amount of the deposit paid.

Joint application

A joint application is when an individual is applying for a home loan together with someone else, such as a spouse.

Monthly instalment

This is the monthly amount an individual has to pay with regard to his/her home loan. Basically, a monthly instalment comprises the following:

• Capital repayment, which is a portion of the original amount, referred to as the principal amount, borrowed from the loan provider.
• Monthly administration cost.
• Monthly interest.
• Insurance premium.

As a general rule, monthly repayments (instalments) should not exceed 30% of an individual’s gross income.

Initiation fee

An initiation fee refers to a once-off, additional upfront administrative cost that banks charge when granting a new home loan.

Loan to value (LTV)

Regarding a home loan, the LTV is the amount borrowed, expressed as a percentage of the fair market value (current value) of the home. For example:

Purchase price of the home = R2 000 000

Loan required = R1 500 000

LTV = R1 500 000/R2 000 000

= 0.75 x 100

= 75%

Offer to Purchase (OTP)

An offer to purchase (OTP), also referred to as the ‘Offer’, is a document that stipulates the basic conditions and terms between the buyer and seller in a real estate transaction.

Basic information included in an offer to purchase is:

• Conditions of sale.
• Fixtures and fittings (items found in and around the home that are included in the purchase price).
• Occupation date.
• Occupational rent.
• Deposits.

Once the OTP is signed by the buyer and seller, it becomes a legally binding document.

Term

Term refers to the period, typically expressed in months, over which the borrower is obliged to repay the mortgage bond.

Usually, home loans are repayable over a term of 240 months (20 years). In some cases, a period of 360 months (30 years) is allowed, depending on the applicant’s financial situation and the value of the loan. However, the longer the term, the more interest is paid.

The process to apply for a home loan

The information that follows is based on information obtained from the websites of SA Home Loans (a specialist mortgage provider) and 5 top banks in South Africa: Absa, First National Bank (FNB), Capitec, Nedbank, and Standard Bank.

Method to start an application

Prospective homebuyers can start the application process by applying online on the particular loan provider’s website or visit one of the branches of loan provider. Some of the banks also provide a phone number at which one of their consultants can be contacted, or even allow individuals to send them a ‘call me back.’

Qualifying criteria to be observed

The qualifying criteria for individuals to apply for a home loan varies from bank to bank. In general, the criteria to comply with can be summarised as follows:

• Certain age: Minimum of 18 years. One of the banks sets a maximum age limit of 60 years.
• Minimum income: An applicant must earn a certain minimum amount (for example, R25 000) per month. In the case of a joint application, at least one of the individuals must earn a certain minimum income per month.
• Applicant must either be permanently employed or self-employed.
• Applicant must have the contractual capacity.
• Applicant must have a clear credit record, or his/her credit score must be above the minimum required.
• Applicant must not be under debt review or debt counselling.
• Applicant must not have been blacklisted for defaulting on debt obligations.
• The related property must be valued at a certain minimum amount or higher.
• Applicant must pass the affordability criteria.

Documents required

Documents required for the home loan application also differ from bank to bank. The following is a general list of documents that will typically be part of a home loan application:

For employed and self-employed individuals

• Copy of South African identity document.
• Suitable proof of residence.
• Copy of the signed offer to purchase (if applicable).
• Copy of marriage certificate or antenuptial contract (ANC) (if applicable).
• Completed application form.
• Completed debit order authorisation form.

Additionally, the following documents are required for employed individuals

• Latest 3 months’ salary slips.
• Latest 3 months’ personal bank statements.
• For variable monthly income (commission and overtime) earners: 6 most recent months’ salary advices.
• One of the banks requires a personal assets and liabilities statement for loan applications above R2.5 million.

Additionally, the following documents are needed for self-employed individuals

• Proof of income:
• Letter of drawings from an accountant.
• Latest stamped 6 months’ personal bank statements.
• Statement of personal assets and liabilities. (Must not be older than 6 months from date of application and must be signed and dated.)
• Latest stamped 6 months’ business account statements.
• Copy of business registration documents or trust deed.
• Latest 2 years’ financial statements.
• Current management accounts not older than 2 months: Required in addition to the annual financial statements when they are older than 6 months to date. To be signed by the applicant and an accountant.
• A rehabilitated insolvent must provide a rehabilitation order as proof of his/her rehabilitation.

Costs[1] (fees) involved when buying a home and securing a home loan for the first time

Make sure whether the costs (fees) are quoted VAT inclusive or not.

Once-off costs

• Home loan initiation fee

This is an administrative setup fee involved in processing the home loan application. The loan is paid on registration of the mortgage bond and is often added to the outstanding home loan balance.

The fee is in accordance with the National Credit Act (Act 34 of 2005). Approximately, an applicant can budget for an amount between R6 000 and R7 000.

• Transfer duty

Transfer duty is a type of government tax payable to transfer a property from a seller’s name to a buyer’s name. The fee is paid directly to a transferring attorney, who is then required to pay it over to the South African Revenue Services (SARS). A property transfer will not be acknowledged until the fee is received by SARS.

The fee is based on the purchase price of the property. Properties of R1 million or less are exempt from transfer duty. Transfer duty on properties above R1 million is calculated according to different tax thresholds.

• Bond registration fee

This is a fixed amount fee based on the value of the home loan and is paid to the Deeds Office for the registration of the mortgage bond. (Estimated cost between R70 and R3 000.)

Some of the banks give discounts on the bond registration fee.

• Conveyancing costs

Conveyancing costs are paid to conveyancing attorneys (lawyers) for registering and transferring a title deed into a buyer’s name. The fee is calculated according to a sliding scale, based on the value of the property.

• Home loan deposit

If necessary or if a requirement in the offer to purchase, a deposit is paid to secure the property. The deposit is usually 10% of the purchase price of the property.

The deposit is not paid directly to the seller of the property, but preferably to a conveyancing attorney or estate agent, who keeps the money in a trust account until the completion of the registration process.

• Postage and sundries

This is a fee charged for the cost of all the necessary documents that a conveyancing attorney will need to submit to the Deeds Office, the bank, and the estate agent, to register the home in the buyer’s name. (A minimum of R300).

Regular monthly costs

• Bank’s service fee

This is a monthly administrative fee charged on a home loan, irrespective of the outstanding balance of the loan. It will only be cancelled when the mortgage bond is cancelled at the Deeds Office. The fee is available on a bank’s annual pricing guide.

• Municipal rates and costs for utilities like water and electricity.
• Instalments on the home loan.
• Insurance like homeowner’s cover (HOC)

If a home is free standing, a homeowner is required to get homeowner’s cover before the bond is registered. Some of the banks refer to homeowner’s cover as ‘Homeowners Comprehensive Insurance’.

• Home contents insurance

Home contents insurance, also called household content insurance, is a type of insurance that covers your home and personal possessions limited to your home address, which is called your risk cover address.

• Life insurance

A bank can possibly require life cover insurance in order to cover the outstanding balance on a mortgage bond should the homeowner pass away.

However, a bank is not allowed to force a homeowner to take out a life policy with the bank. If the bank requires life cover, the homeowner is permitted to take out his/her own life cover policy and cede it to the bank.

Temporary costs

• Occupational rent

If the buyer occupies the property before the transfer and bond have been registered in his/her name, the seller is entitled to charge the buyer occupational rent.

Typically, the rental amount is agreed on by both parties, aided by an estate agent, and stipulated in the offer to purchase.

The buyer is obliged to pay occupational rent while he/she is living in the home until the transfer and bond registration have been finalised.

Calculators available

All the banks provide calculators on their websites to ease the application process. The two most common calculators are:

• Affordability calculator

This is a calculator that enables an applicant to determine how much he/she could qualify for before applying for a home loan, based on income and expenses.

Bear in mind, the calculator’s calculation is only an estimate. A bank’s final offer is subject to an individual’s risk-profile, affordability, and credit assessment.

• Home loan repayment calculator

This type of calculator allows an applicant to calculate his/her monthly instalments (repayments) on a new home loan, based on the value of the home the applicant intends to buy.

One of the bond originators provides additional calculators, namely:

• Bond and transfer calculator

Helps a prospective home buyer to determine what his/her bond registration and property transfer costs would be.

• Deposit and savings calculator

Enables a person to determine how long it will take to save for a deposit for a first home.

• Additional payment calculator

Allows a homeowner to enter the additional amount he/she could afford to pay into their bond account to calculate how much can be saved concerning time and money.

• Amortisation calculator

This calculator indicates what percentage of a bond repayment is allocated to capital and what percentage goes towards interest payments.

Measures implemented by banks to make home loans more readily available

Banks make use of different ways to make it easier for individuals to obtain home loans, making it more affordable to own a home. The measures differ from bank to bank with the following list a general view of what some of the banks offer in this regard:

• Government employees applying for a new home loan could get a discounted interest rate.

• The Finance Linked Individual Subsidy Programme (FLISP)

A first-time homeowner earning a joint income between R3 500 – R22 000 may qualify for the FLISP, receiving a housing subsidy from the government. The subsidy is a once-off lump sum payment, ranging between R27 960 and R121 626 – depending on the monthly income, towards the cost of the owner’s home.

The maximum price of a property that can be subsidised through FLSIP depends on what is affordable by the homeowner.

• The affordable housing loan

Available to individuals who earn a single or joint gross monthly income of R3 500 – R24 300.

Using a bond originator to apply for a home loan

There are numerous bond originators, also called mortgage originators, in South Africa.

Typically, when an individual wants to make use of a bond originator, he/she is required to register with the originator.

It is also advisable to get prequalified, indicating what is affordable regarding a home loan.

A bond originator acts as an intermediary between the home loan applicant and the home loan providers, assisting the loan applicant with the loan application and then submitting it to all the leading banks on behalf of the applicant.

The application process when making use of a bond originator

• Preparation of the home loan application

The bond originator will help the applicant to complete the application form and to get all the necessary documents in order.

• Submit the application

The home loan application is submitted on behalf of the applicant to multiple banks, including the applicant’s own bank.

• Negotiations with the banks

The bond originator negotiates with the banks to get the best deal, including the best interest rate possible and a zero-deposit mortgage bond if required.

• Discuss the offers (quotes) received from the banks

The mortgage originator discusses the offers (quotes) from the banks, helping the applicant to choose the one that is best for him or her.

• Acceptance of the best offer (quote)

Once the applicant has decided on an offer (quote), the bond originator notifies the particular bank, and the conveyance process starts.

Advantages of bond originators

• Free service

Bond originators receive commission from the bank and from the conveyancing attorney, so they provide a free service to the home loan applicant.

• Save money

Bond originators will use their good relationships with the various banks to negotiate the best possible home loan deal and the most competitive interest rate for the home loan applicant.

• Save time

Using a bond originator means a speedier application process, saving the applicant valuable time.

• High rate of success to get home loans approved

Using a bond originator is not a 100% guarantee that an applicant will get a home loan. However, the chance to obtain a home loan through a bond originator is much higher for an applicant than going on his/her own.

[1] See the article, ‘Understanding Bond Costs in South Africa – A Useful Guide,’ for more information about bond costs.