Advantages of Increasing the Payments on Your Home Loan

Advantages of Increasing the Payments on Your Home Loan

Consider paying an additional amount on your home loan payments no matter how small the amount may be. A small amount each month can significantly reduce the overall amount on your home loan. Carefully go through your monthly budget and see how much you can afford to pay extra per month. Do not rely on good intentions to pay this extra amount into your home loan but increase your monthly debit order with your bank so that this new amount will automatically be deducted from your account. This amount can always be reduced at a later stage when you are going through a rough time financially, the extra payments you made up until then would have contributed to lessening your captial sum.

Increasing your monthly payments on your home loan has significant benefits for the home owner. The positive difference between the net resale value and the outstanding home loan balance will increase much faster and create some financial flexibility during those unpredictable financial hard times that pop up ever so often. Increased payments on your home loan are also a way of saving on tax as you are effectively investing your money at the current bond rate tax-free, while anyone putting the same amount on a fixed deposit, for example, will be earning up to 5% less with tax being payable on the interest received.

Although banks generally no longer apply penalties for paying off your home loan earlier than what was originally agreed upon, you should make sure that this does not apply to your bank before you decide to pay off your home loan quicker through increased monthly payments. Check your home loan agreement carefully making sure there is no clause which allows the bank to add penalty interest for increased monthly payments on your home loan

There are other ways to reduce the capital amount owed on your home loan. Instead of paying your monthly payment on the last day of the month you can move it forward a couple of days and save on interest. Also when you receive a once-off payment like for example a bonus on your salary you can pay a portion or even all of it into your home loan. If you pay an amount of R20 000 into a home loan of R200 000 that has just started, you can pay your home loan off in about 8 years less then the original time period.

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South African Home Loan Terminology

South African Home Loan Terminology

Access Bond – You can draw money ( up to a predetermined amount ) from this type of home loan.
Administration Fee – This fee is charged by the lending bank to cover the initial costs of processing a home loan application.
Agreement of Sale – Contract stating the terms and conditions under which the property is sold
Assessment – This is the bank’s assessed value of the property. It will usually be done prior to the final approval of your home loan.
Assessment Fee – Cost of the administration work that accompanies an assessment.
Bona Fide – Means ” in good faith”
Home Loan / Bond Costs – Fees payable to the registering attorney which includes conveyancer’s fees, stamp duty and VAT.
Home Loan / Bond Registration – Fee payable for the registration of a home loan in the new property owner’s name.
Home Loan / Bond Term – Original term over which the home loan was taken.
Broker / Estate Agent – Person or persons who bring buyers and sellers together and negotiate contracts for them.
Building Loan – This type of home loan is usually issued to a buyer of vacant land for the purpose of building on the land.
Capped Home Loan Interest Rate – Limits the amount the interest rate on an adjustable rate home loan can change over the life time of the home loan.
Collateral – Assets that are required as security for your home loan.
Contract of Sale – This is the agreement between seller and buyer covering the price, terms and conditions of the sale.
Conveyance – Document used to effect a transfer.
Credit Profile – A report detailing the credit history of a prospective borrower that’s used to help determine borrower creditworthiness before a home loan application will be approved.
Deed – This is a legal document by which title of a property is transferred from one owner to another.
Default – Term use to denote failure to make payments on a home loan.
Equity – The amount by which the value of the bonded property exceeds the outstanding amount on the home loan.
Finance Charge – Interest charge on a home loan
Fixed Home Loan Rate – The interest rate on a home loan is fixed for an agreed period of time and will not change for that period even if the variable home loan rates rise or fall.
Foreclosure – Legal process by which a bonded property may be sold to pay off a home loan that is in default.
Freehold – Ownership of the property as well as the land on which the property is built on
Grace Period of Home Loan – Amount of time after the due date of the home loan payment in which a payment may be made without a late penalty fee being applied.
Home Loan Application – A statement of personal and financial information required by the bank when you apply for a home loan
Home Loan Plus Costs – Allows borrower to lend more than 100% of the property value to cover the registration and transfer costs.
Interest – Fee paid for borrowing money usually calculated as a percentage of the remaining balance of the amount borrowed.
Interest Rate on Home Loan – Annual rate of interest charged on a home loan.
Lender – Bank, Mortgage Company, or Mortgage Broker offering the home loan.
Mortgage Broker – Individual or company that arranges home financing for borrowers.
Mortgage – Agreement with the bank stating that the bank will lend you a certain amount of money in the form of a home loan that will be paid back over a period at a certain interest rate.
Offer to Purchase – Offer in writing from the buyer to the seller which becomes a legal contract once it is signed by all the parties.
Pre-Approval – Lenders firm commitment on a home loan.
Prequalification – Process of determining the amount of home loan you are eligible for.
Purchase Agreement – Contract stating the terms and agreement under which the property will be sold.
Refinancing – Process of paying off one home loan with the proceeds of a new home loan on the same property.
Second Mortgage – Additional mortgage placed on a property that has rights that are subordinate to the first mortgage.
Term of Home Loan – Period between the beginning of the home loan and the date the entire balance of the home loan is due.
Title Deed – This document gives evidence ownership of a property.
Underwriting – Process of determining the risks involved in a particular home loan and establishing suitable terms and conditions for the home loan.

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Low earners bank on R47bn in home loans

Low Earners Bank on R47bn in Home Loans

Banks plan to have spent close to R47-billion to finance mortgages for “affordable housing” by the end of this year.

The Banking Association of SA said the four major banks had spent R39.6-billion by the end of March on financing new homes and providing home-improvement loans for the affordable housing market. The association said banks were well on target to meet and exceed their December deadline for spending the R42-billion earmarked for housing loans for households earning between R1500 and R10000 a month. It said banks had altered Financial Sector Charter projections and, by the end of the year, they expected to have spent R46.8-billion on affordable housing.

An example of the affordable housing efforts of the banks is the mixed-use development, Cosmo City, at Kya Sands, north of Johannesburg. It will have 12500 housing units, made up of fully and partially subsidised dwellings, rental apartments and bonded houses. The houses, aimed at civil servants such as teachers, nurses and police, range from 45m² to 65m². They cost between R180000 and R250000 in 2006, but t oday some of the properties are worth more than R350000.

The Financial Sector Charter housing co- ordinator for the association, Pierre Venter, said two thirds of the R39.6-billion was spent on financing new houses and the remainder on home improvements. Venter said the banks had at first thought that 80percent of the funding would be used to finance new houses.

The 67percent spend reflected the continued problem of a shortage of stock for affordable housing. He said the banking body wanted the government to tackle the issue. It had commissioned two reports on the drivers of increase in the cost of building, and projections of the housing supply between next year and 2013.

The association said its latest research, in 2005, revealed an estimated 650000-unit backlog in the affordable-housing market. But the department of housing currently faces a 2.3million backlog for Breaking New Ground housing. “The commissioned studies, expected to be available in the next two months, are critical for us to assess how much progress we have made in the partnership and what we need to do in future. “The affordable-housing backlog is also under strain from issues of land availability and infrastructure development. “Some areas have not been upgraded to accommodate densification and we need speedy implementation of infrastructure for the new developments,” said Venter. The banking body said it was encouraged by the achievements despite the challenges.

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Tips on how to get your South African home loan approved

Tips on How to Get your South African Home Loan Approved

Even though property prices have soared in recent years, you can probably still obtain a home loan to buy your own home if you are earning a regular salary. Here are some ways that you can get that home loan you need to become a home owner without needing an excessively high income.

Look For Special Home Loan Deals

Keep an eye out for special deals offered on home loans by the various banks in South Africa. There are good home loan products specially designed for first time home buyers who do not have huge incomes or cash on hand to pay deposits on the home loans. Always try and negotiate with the bank on a better interest rate as even a small decrease on your interest rate can make quite a large difference on your monthly repayments. For a family on a tight budget even a R100 less per month spend on your bond can make a big difference.

You can often bargain with a home seller to get the price down to something that you are more able to afford so do not just accept the first offer as something you cannot afford. Also keep in mind that many of the cheaper properties are not always advertised so drive around in your area and look out for the “For Sale” signs in front of houses. Do this especially on sundays as this is the day most sellers choose to place their homes on show.

Increase Your Home Loan Repayment Period

You do not have to take your home loan over a 20-year period but you could stretch it over a 30-year period. This will cause your monthly repayments on the home loan to be lower which will allow you to afford a higher loan amount. On the negative side this kind of home loan will cost you more over the long run in the form of the interest you will pay.

Get a Joint Home Loan

If you cant afford a home loan on your own salary consider buying a home with a partner. Instead of looking at your personal income as a measure for calculating an amount you can afford on a home loan, banks will look at the joint gross income of the two partners buying property together. If your gross income is R4000 and that of the partner is R8000 the bank will calculate the amount that you jointly qualify for on the combined R12000 income. The bank usually will not give a home loan on more than 30% of the gross income so jointly you should be able to get a loan for R400000. If you decide to take this option make sure that you sign a legal agreement with the partner on the amount each will pay on the repayments of the home loan and how the proceeds should be spilt when the home is sold in the future.

Enter The Market With a Lower Value Home

A common mistake prospective home buyers make, especially first time buyers, are that of aiming to high. Only for a hand full of people will their first home be their dream home. It helps to get into the property market first with a lower value home and after a few years, with the increase in value of your property and promotions in your job, you will be able to afford a better home.

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Reasons why your home loan application may be rejected

Reasons Why Your Home Loan Application May Be Rejected

You are excited to buy your new property and found your ideal home. But the excitement quickly turns to disappointment when your home loan application gets rejected by the bank. In this article I will highlight a few reasons why home loan applications are turned down.

Gross income too low to afford the property 
The qualification figure for a home loan is 25 to 30 percent of the joint gross income of the applicants; if the monthly repayments exceeds this figure the home loan application will not be approved. As property prices have been increasing it has become more and more difficult to qualify for a home loan in South Africa with this criteria.

Home loan applicant’s credit profile
The applicant’s credit profile is an important consideration for banks when they consider the home loan application for approval. The bank uses a scoring model which takes into account the current income, employment history, consumer bureau results and applicant’s performance with the bank itself. A poor scoring in one or more of these factors may lead to the home loan application being turned down.

Home loan applicant’s payment history 
Your payment history across a variety of recorded transactions will be scrutinized by the bank before your home loan is approved. Skipped payments on motor vehicles, furniture, clothing and professional services as well as any other bad debts may contribute towards your home loan application being turned down.

No deposit available
If you cannot afford the deposit or the registration costs up front you will have to apply for a 100 percent home loan. A 100 percent home loan could push the monthly payments beyond what you can afford to pay monthly.

Physical assessment of the property
The bank will make a physical assessment of the property before the home loan is approved. The condition of the property, location, security and demand for property in the area will be considered and a severe shortcoming in one or more of these areas could also lead to the home loan application being rejected.

If you applied for a home loan and the bank rejected it, found out on which criteria you failed. If you believe that the loan was unfairly turned down raise the issue with the bank or work on the areas that you can improve before applying for a home loan again.

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Growth in mortgage advances slowing down further

Growth in Mortgage Advances Slowing Down Further

Year-on-year (y/y) growth in mortgage advances by monetary institutions declined further in June 2008 to its lowest level in almost 4 years. A growth rate of 19,9% y/y was recorded in June compared with 20,6% y/y in May. This was the lowest year-on-year growth in mortgage advances since the 19,5% registered in August 2004, and well below the 31% y/y growth rate recorded in October 2006 when mortgage advances growth peaked.

The further slowdown in mortgage advances growth is to a large extent a result of the housing market having cooled off markedly in recent times. This is also evident from calculating the annual flow in mortgage advances, which was down by 6,5% y/y in June.

The granting of new mortgage loans by the banking sector on residential property was also significantly lower in the first quarter of 2008 compared with a year ago. These developments on the property front are largely a reflection of the household sector that is under severe financial pressure on the back of the tightening in monetary policy since mid-2006. The upward trend in interest rates has caused mortgage repayments in general to rise by 35,6% over the past two years.

Although CPIX inflation is well above the 6% level, it is expected to peak in the near future and to gradually decline over the next 18 to 24 months. Economic activity is slowing down over a wide front, with conditions deteriorating further in various sectors of the economy. These developments, together with a lower international oil price and a stronger rand exchange have reduced the risk of interest rates being hiked again at the Monetary Policy meeting in August. However, currency and oil and food price volatility may keep inflation and interest rates under upward pressure.

Mortgage advances growth is projected to taper off further towards the end of 2008, largely driven by the effect of the higher interest rates, the effect of the National Credit Act on credit extension by financial institutions to consumers, the difficult financial conditions consumers are experiencing in general, and the slowdown in the housing market.

Authored By: Jacques Du Toit
Published By: Absa Home Loans

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Banks tighten screw on risky bond clients

Banks Tighten Screw on Risky Bond Clients

Pretoria – At least two of the country’s major banks have tightened up on the access high-risk clients have to the flexible reserve funds in their mortgage bonds.

Gavin Opperman, the managing executive of Absa Home Loans, confirmed yesterday that the bank had notified its high-risk clients last week that they would no longer be able to access these funds.

Jan Kleynhans, the chief executive of FNB Home Loans, said the mortgage division of First National Bank (FNB) had introduced similar measures for its high-risk clients.

However, Leon Barnard, the director of personal and business banking products at Standard Bank, said no limitations had been placed on its clients with existing access bonds.

Barnard said Standard Bank would reassess its risk only if a client applied for a further bond over the property.

Spokespeople for Nedbank were unavailable for comment.

Opperman defined high-risk clients as those who had defaulted on paying another loan or had a cheque bounce.

He said this restriction applied to about 15 percent of Absa’s home loan customers.

Absa finances one in every three houses acquired through a mortgage bond and has about 670 000 home loan customers.

South Africa’s household debt service ratio has risen from about 9 percent in 2003 to just below 12 percent.

John Loos, a property analyst at FNB, said this week that a debt service ratio of 12 percent was “the normal pain threshold”. It had been particularly bad in 1998 when it reached 14 percent.

Reserve Bank figures show that total outstanding mortgage bonds, after capital repayments, have doubled in three years to R898.3 billion at the end of May from R449.2 billion outstanding in May 2005.

Residential mortgages exceed 80 percent of the total.

Opperman denied market rumours that Absa had put a blanket ban on all flexi reserve withdrawals on home loans.

It would be crazy to do this, he stressed, because a mortgage bond was the best place for customers to park lump sums, such as bonuses, and to consolidate their debts.

He said the measure was aimed only at clients who were “living off their mortgages” and was in line with Absa’s philosophy of responsible lending.

Opperman said the move was linked to the slump in the residential property market, which was likely to last far longer than the 1997/98 slump.

“We anticipate this one is going through to 2009. If it was going to turn in two to three months … we would not have taken these measures.”

He said the greatest risk to both the bank and its high-risk customers came from drawdowns on their mortgages at a time when property prices were declining, which could result in negative equity in their bonds.

This happens when the price at which a house can be sold, excluding any costs and outstanding debt, is less than the outstanding amount of the home loan.

Jacques du Toit, Absa’s senior property analyst, forecast this month that house prices, excluding the effect of inflation, were in line for a drop of about 6 percent on average this year with a further decline of 3.3 percent next year.

Opperman said that if any of Absa’s home loan customers wanted to draw funds from their bonds, there was nothing prohibiting them from applying, at no cost to them, to do so.

Authored By: Roy Cokayne
Published By: Business Report

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Rate hikes cut into new loans

Rate Hikes Cut Into New Loans

Johannesburg – While total mortgage loans have continued to grow, the value of new mortgage loans is falling – a sign that the 5 percentage point rise in interest rates over the past two years is putting a curb on borrowing.

Over the 12 months to May, banks’ total mortgage books rose by about a fifth, but Efficient Group economist Fanie Joubert said that only R10.3 billion in mortgage advances was awarded in May, “compared with an average monthly rise of around R14 billion during the previous 12 months”.

He commented yesterday after the Reserve Bank released data on private sector credit.

The falling trend in new mortgages granted has been in place for a while. John Loos, a property strategist at First National Bank, said that new mortgages and readvances fell 16.7 percent in the first quarter compared with the same quarter last year, while the value of new commercial loans fell “a massive 61.3 percent”.

Loos said that because the value of outstanding mortgages was large – R898.3 billion at the end of May – the trend in new loans was not immediately obvious. “Capital repayments on [mortgage] loans have been catching up with payouts. This suggests that growth in the value of mortgage loans outstanding will decline steadily for some time to come,” he said.

Over the 12 months to May, growth in total mortgages outstanding slowed from 21.9 percent in April to 20.6 percent, the lowest in three years, according to Jacques du Toit, a senior property analyst at Absa.

Stanlib economist Kevin Lings pointed out that the year-on-year growth figure, though still high, was well down from a recent peak of 30.9 percent year on year in October 2006.

Another pointer to the effectiveness of tight monetary policy is that growth in credit granted to households is falling – and would have fallen further if not for technical changes made in January, Lings said.

Annual growth in household debt slowed to 21.7 percent in May from 22.4 percent in April.

The Reserve Bank implemented a new accounting framework that cut the opportunities for banks to net off liabilities and assets, so their balance sheets appeared larger.

Before the disruption, Lings said, 12-month growth in credit to households had slowed to 19.5 percent from a peak of 28.2 percent in February 2006.

In January, when the adjustments were made, the growth figure jumped to 24.1 percent. The downward trend is now re-emerging.

Joubert said: “Another welcome development is that the ‘other credit’ item, which includes overdrafts and credit cards, decreased for the second month in a row – by R2.6 billion in April and R2 billion in May.

“This comes after strong rises during the first quarter.”

However, overall growth in private sector credit rebounded slightly to 19.7 percent in May, from 19.6 percent in April.

The high levels of overall debt could be due to distress borrowing, as consumers found themselves unable to meet their commitments, said Lings.

That would explain the “apparent disconnect between the credit figures and other data”.

These include a 28 percent drop in motor vehicle sales over the 12 months to May, and a fall in house prices.

When the Reserve Bank raised the official repo rate to 12 percent last month, it referred to the slowdown in the property market.

It said: “According to the Absa house price index, house prices in the middle segment of the market have been declining marginally in nominal terms, on a month-on-month basis, since February. The Standard Bank index shows the median house price declined 13.3 percent year on year in May.”

Despite this evidence that rate rises were doing what they were meant to do, Lings said, the repo rate was likely to be lifted at next month’s monetary policy meeting.

Authored By: By Ethel Hazelhurst
Published By: Business Report

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Lowest mortgage advances growth since late 2004

Lowest Mortgage Advances Growth Since Late 2004

According to data released by the South African Reserve Bank, year-on-year (y/y) growth in mortgage advances by monetary institutions has dropped to its lowest level in more than 3½ years, with a growth rate of 20,6% y/y recorded in May this year (21,95 y/y in April). This was the lowest year-on-year growth in mortgage advances since October 2004 when it was 21,4%. In May 2008 mortgage advances came to R898,3 billion, a
doubling over the past three years in the total amount outstanding since a level of R449,2 billion was recorded in May 2005.

With residential mortgages having a share of more than 80% in total mortgage advances, the further slowdown in the growth in mortgage credit is largely a reflection of the housing market having cooled off, while there are signs that the commercial segment has also slowed down. Households’ financial strain increased in recent months as a result of rising inflation and interest rates. Mortgage repayments have risen by a total of 35,6% in view of the cumulative 500 basis point worth of interest rate hikes since June 2006.

In view of inflation remaining under upward pressure on the back of sharply higher fuel and food prices, a weaker rand exchange rate, and expectations of rising inflation over the short term, interest rates are expected to be hiked further by another 50 basis points at the next Monetary Policy Committee meeting in August. With commercial banks expected raise their prime lending and mortgage interest rates to 16% as a result, the
average mortgage repayment would have risen by more than 39% since mid-2006, putting further pressure on households’ finances and making housing even less affordable.

Taking into account the abovementioned developments and expectations, mortgage advances growth is forecast to continue its declining trend to well below current levels at year-end and into 2009, largely driven by the effect of the rising interest rates, the effect of the National Credit Act on credit extension by financial institutions to consumers, the difficult financial conditions consumers are experiencing in general, and the slowdown in the housing market.

Authored By: Jacques Du Toit
Published By: Absa Home Loans

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Homes to fold on rates pressure

Homes to Fold on Rates Pressure

Johannesburg – South African households and the residential property market won’t be able to handle much more of an increase in interest rates, warns an FNB economist.

Prime rates need only rise to 18% to inflict the same financial pain to consumers they did when rates surged to 25.5% in 1998, said FNB property strategist John Loos in a report released on Monday.

The performance of the residential property market could be equally negatively affected, says Loos.

That implies that an already depressed housing market – which has seen sales volumes drop by around 30% in the first quarter of 2008 (year-on-year) and house-price growth slow to 6.8% in April (Absa figures) – faces an even gloomier outlook if rates continue to rise.

Absa figures show that back in 1999, house price growth dropped to below 5%. At the time, most banks also reported a sharp rise in property repossessions as homeowners struggled to meet higher bond repayments.

According to SA Reserve Bank figures the percentage of home loans that were in arrears for more than three months in 1999 was around 9%.

Arrears dipped to less than 2% by 2005 but have steadily increased again to more than 3%.

Loos concedes that some economic conditions are different today than they were in the late nineties, which makes it difficult to make exact comparisons.

He nevertheless believes that consumers’ “pain threshold” to weather higher interest rates is far lower now than it was in the nineties given the higher level of current household indebtedness.

Loos points out that in late nineties household debt-to-disposable income ratio was at the 55% to 60% level. That has recently jumped to close to 80%.

More worrying though is the increase in the household debt-service ratio, which Loos maintains is more closely linked to residential property performance than the debt-to-disposable income ratio.

The debt servicing cost ratio is currently at around 11%, the highest level since 1999 when the ratio peaked at around 14%.

Loos argues that although the rising cycle of debt servicing costs still appears normal by historic standards, it is way above the 6.3% low recorded end-2003.

Loos says a normal debt cycle would appear to be where the debt-service ratio peaks at around 12%, as happened in 1986, 1990/91 and again in 1997.

In 1998 the debt-service ratio jumped to close to 14%,which Loos regards as abnormally high. That was short-lived with the SARB dropping rates within two months by 725 basis points.

Loos maintains that if interest rates are hiked for the last time this year by 50 basis points in June, SA would probably have a very normal peak in the debt-service ratio cycle at just above 12%.

“But if rates go up to around 18% by the end of 2008, the debt-service ratio will rise to around 14%, conflicting a similar level of financial pain on households to what it did in the 1998 interest rate shock when rates surged to 25,5%.”

Loos says for SA households to get back to a debt-service ratio of around 6.5% would require a prime rate of 8% by year-end, a likelihood that he refers to as the “impossible scenario”.

Authored By: Joan Muller
Published By:

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