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I am a qualified Attorney. I specialise in Property Law, Commercial Law, Corporate Law and Trusts.
 
Please visit our website at www.prop-law.co.za for more details.
 
I am an elected Committee Member of the Property Committee of the Association of Pretoria Attorneys and through my involvement, I like to ensure that I am constantly at the "sharp-end" of Conveyancing Practice.

I am the elected Chairman on the Gauteng Council of SAPOA. The South African Property Owners Association (SAPOA) is the biggest and most influential institution in the property industry. SAPOA members control about 90% of commercial property in SA, with a combined portfolio in excess of R150 Billion (about $22 Billion). I am also on the National Council and the National Legal Committee of SAPOA.
 
Member of the Institute of Directors South Africa and Member of the Sirdar Governance Panel.

24 February 2014

Many options for structuring your home loan

It is interesting to note that each bank offers small variances with regard to different aspects of the Loan.  It is important for the applicant to determine what is important to them.

Gareth Shepperson
Commercial and Property Attorney















Many options for structuring your home loan

Once your home loan has been approved, you'll be faced with some important decisions, such as choosing the term of the loan, choosing insurance over your life and your property, and deciding whether to opt for a variable or a fixed interest rate. These decisions have major cost implications.

Arguably, your biggest decision is in respect of the term of your home loan.

Most people assume that a 20-year term is their only option, but some banks let you choose a term of less than 20 years. Other banks don't, but will give you a loan for 25 or 30 years. It's important to find out what options are available to you when you apply for a home loan.

Praven Subbramoney, head of product and sales at First National Bank (FNB), says FNB gives customers the option to choose 'any term shorter than 20 years' - although the demand for short terms is very low, he says.

FNB does not offer customers 30-year bonds, Subbramoney says. 'The instalment on a 30-year loan is 10.6 percent smaller than the instalment on a 20-year loan, but it will cost you 50 percent more in fees and 63.6 percent more interest over the life of the loan.' (See the table on the right for cost differences between a 20-year and a 30-year home loan.)

Standard Bank offers a 30-year home loan but does not offer terms of less than 20 years.

Steven Barker, head of home loans at Standard Bank, says a 30-year loan means you're in debt for longer and results in you paying more for your loan than a customer with a 20-year loan term.

He says 'most customers' opt for a longer loan term to ease their affordability pressures when taking out the loan. 'However, they quickly begin to pay additional funds into their loan to reduce the term and finance charges.
'
Barker says that it's best to opt for 20 years: 'Once a bond is registered, the term is fully flexible and can easily be changed.'

Peter Swartz, head of business development at Absa Home Loans, says that, depending on the client's ability to afford increased monthly instalments, Absa will give home loans over less than 20 years. Most of the home loans granted by the bank are for 20 years.

Nedbank also offers terms of less than 20 years, subject to credit approval. The bank's maximum loan term is 25 years.

When you enter into a home loan agreement with a bank or mortgage lender, you pay the bank according to a variable interest rate. In other words, the interest rate varies in line with movements of the prime lending rate.

The prime lending rate is fixed at 3.5 percentage points above the repurchase (or repo) rate, the interest rate at which commercial banks can borrow money from the Reserve Bank. The prime rate is currently nine percent.

Banks usually charge their 'best' customers prime less one or even two percent on home loan agreements. Most home loan clients will pay prime or prime plus one or two percent.

A variable interest rate is the standard interest rate option. Another option is a 'fixed' rate. Subbramoney explains: 'A fixed interest rate is an agreement between the bank and a bond holder for the outstanding balance at a specific point in time at an agreed interest rate for an agreed term.'

Fixing is attractive when interest rates are on an upward trend, because it offers you a measure of stability. Depending on your bank, you can select a contract period of 12, 18, 24, 36, 48 or 60 months, and in that term your bond repayment won't go up or down, irrespective of charges in the prime lending rate.

FNB is offering fixed rates over 12, 18, 24, 36, 48 and 60 months. The rates range from prime plus 1.1 percent for 12 months to prime plus 2.55 percent for 60 months.

Nedbank is also offering fixed rates over 12, 24, 36, 48 and 60 months. The rates range from prime plus 2.2 percent and prime plus 3.6 percent.

Standard Bank is offering a fixed rate, but for only 36 months. Barker says the bank's current fixed rate offer is 'in the region of 11 to 13 percent (or between two and four points above prime)'.

The National Credit Act regulates the maximum interest rate that you can be charged on any credit agreement. On mortgage agreements, the maximum the bank can charge you is the repo rate multiplied by 2.2 plus five percent a year. So, with the repo rate at 5.5 percent, you can't be charged more than 17.1 percent a year.

Subbramoney says interest on a home loan is charged from the date of registration of a new home loan and is calculated on the outstanding balance of the bond 'multiplied by the interest rate applicable divided by 365 days multiplied by the number of days in the month'. He says amortisation is making payments that include the amount registered (capital) and the interest of the loan for a specified period.

Mortgage originator ooba has an amortisation calculator that shows you how much of your bond instalment goes towards interest and how much goes towards reducing the actual capital amount. (Go to www.ooba.co.za/calculators/homeloan)

For example, on a loan of R1 million over 20 years at an interest rate of nine percent for the entire term, the calculator shows that, initially, the lion's share of your instalment goes toward interest. Only in month 149 (after paying your bond for 12 years and five months) do you start paying more towards your capital than towards interest.

Personal Finance

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