Commonly asked questions by first-time homebuyers

Commonly asked questions by first-time homebuyers

With the recovery in the residential property market looking set to continue into the second half of 2010, an increasing number of potential first time buyers are considering making what will be the largest purchase of their lives so far.

Craig Deats, Executive Director Sales and Distribution at ooba, provides answers to some of the most commonly asked questions by these first-time buyers:

How much can I afford?

As a first-time home buyer it is important to know exactly how much money you can borrow for your new home and, most importantly, what monthly repayments you can afford. One should use affordability as the main factor in deciding the loan amount to apply for. Your bond originator will help you in calculating and determining what you can afford.

Determining the right price range is an essential first step to avoid wasting time looking at unsuitable properties. Make sure that you are aware of all the costs involved in buying a home. In addition to paying a deposit there are a number of other upfront costs involved such as legal costs, transfer duty, bond registration fees and bank fees. These costs all need to be budgeted for.

What criteria do the banks use to award home loans?

The main reasons for bond applications being declined are affordability and credit profile. Prior to the NCA affordability was a simple calculation based on 30% of income. Affordability is now based on net disposable income and for most people this means access to less credit than would have been the case in the past. A clean credit history and being up to date on all debt instalment payments is important. Additional factors that banks look at would include:

Your current financial situation

Whether or not your financial situation will change in the next few years

If your income is steady or fluctuating

It is advisable that you shop around with multiple lenders. According to the latest ooba statistics, 29.4% of applications in July 2010 that were declined by one lender were approved by another, indicating that it is important to approach multiple lenders to ensure a positive outcome on your home loan. Shopping around also ensures that you get the best rate on

What information do I need to submit to the bank?

To assist the bank in determining its risk, you will be required to provide personal information such as bank statements, salary slips, a statement of assets and liabilities, and information on your credit history, including whether you have ever been insolvent.

How can I get the best interest rate?

The lower the bank's risk in lending funds to a particular borrower, the better the rate it will offer the individual. In calculating its risk, it will include factors such as the loan-to-value ratio (the amount of deposit you are willing to put down to offset against the purchase price thus reducing the required loan amount), the size of the loan, as well as the repayment-to-income ratio (the ratio between the bond payment and the buyer's income).

The size of the bond that you apply for, your credit history and the investment value of the property you intend buying are some of the factors that affect the rate you will be offered. Shop around and negotiate with various banks to ensure you get the best package. A convenient way to do this is through the services of a bond originator.

Should I fix my interest rate?

If you are working to a tight monthly budget and you can afford to, it might be prudent to fix your rate now, even though fixed rates are usually higher than variable rates. Many people make the mistake of waiting for rates to rise before locking themselves into a fixed rate. Before buying a property, stress test your budget to ensure you will still be able to meet your mortgage repayments if rates start to rise.

How can I calculate the transfer and registration costs?

The user-friendly calculators on the ooba website (www.ooba.co.za) will help you determine the exact costs involved, and will enable you to work out your future repayments if rates increase. It's advisable to try and make your budget stretch to cover an interest rate hike of three hundred points above your initial variable rate.

What deposit should I put down?

Besides improving your chances of getting your home loan approved, a bigger deposit could result in a more favourable bond rate which will save you in interest over the term of the loan. As a home loan is paid back over a long period, generally between 20 and 25 years, even a small deduction in the interest rate on your bond, can save you thousands in interest payments over time.

How can I bring down my monthly repayments?

The less you owe the smaller your monthly loan repayments will be, so put down as big a deposit as you can afford. Never miss an opportunity to pay extra funds into your bond, such as your 13th cheque, share payouts, tax refunds and bonuses. Paying in even small amounts over and above your normal repayment can knock years off the term of the loan and substantially reduce the interest payable.

Why should I use a bond originator?

Bond originators specialise in shopping around with multiple banks and negotiating the best deal for the customer. Obtaining a preferential rate of just 0,1% below the prime rate can make a big difference to your monthly repayments.

However, in negotiating the best package, the bond originator needs to take more than just the rate into account and will structure a package that best suits the individual's needs overall. To secure a competitive rate, the originator maintains relationships with several different banks, enabling him to compare their offerings, make a recommendation to the client, and then obtain fast approval of the loan.

The service offered by an originator includes facilitating bond negotiations with all major lenders in one simple process from prequalification to registration - with less hassle and minimal paperwork. The originator will also provide regular feedback of progress on your application. The service is free to homebuyers. Bond originators already source over 60% of all new home loans in South Africa.

Hello ooba news

When applying for a home loan, one of your most important considerations should be securing the lowest interest rate possible. And when the home loan is granted, you should do everything you can to reduce the term and the interest that you pay.

It came as some relief to homeowners when the prime interest rate was cut by 50 basis points to just 8.5% last month. Although this provides a welcome reduction in the monthly costs of repaying a mortgage, ooba, the South African home loan experts, say it would be wise for people to keep their repayment levels unchanged.

Despite the buyer's market in the property industry at the moment, in the wake of the global economic downturn, banks are still wary of granting 100% home loans. In light of this, if you're considering buying a home, it's a good idea to start saving up for a decent deposit.

If you're thinking about buying your first home, get your financial affairs in order as soon as possible. You need a clean credit record to secure a home loan. Unless you have a clean record of servicing debt, your bank will be unlikely to grant you a home loan.