How do home loans work exactly?

Article summary

• A home loan is when a lender, usually a bank, lends you the money you need to cover a home purchase.
• Every month you pay back a portion of the loan along with interest.
• You pay per month until the home loan is repaid, which can take up to 20 or 30 years depending on whether you get a 20-year or 30-year bond.
• Factors such as your credit score and the size of your deposit determine whether the bank is likely to grant you a home loan, and how high your interest rates will be.

Home loans — how home ownership becomes a realistic option for those who may have otherwise perceived it as a distant dream.

So how do home loans work, and how do you acquire one?

What is a home loan?

• Simply put, a home loan is when a lender, usually a bank, lends you the money you need to cover a home purchase.
• It’s good to know that, if you find your dream home, you have a way of obtaining ownership of it without having to pay the full price of the home (which could be in the millions) upfront.
• A home loan means you pay the price of the home back in monthly instalments over 20 or 30 years.

What do you pay for a home loan?

Every month, you pay a portion of what you owe on your home loan.

You can use our Repayment Calculator to determine what you will pay per month on a home loan.

In addition to the monthly repayments, you will pay interest rates.

Interest rates are affected by:

• The prime interest rate, which is determined by the South African Reserve Bank.
• Your credit record, which is a three-digit number that tells the bank how sound your financial situation is.
• The duration of your bond (the 30-year bond has higher interest rates).
• Your deposit (what you pay upfront for the home loan, usually 10% of the total purchase price).

More on credit records

Your credit score will be a three-digit number ranging from 0 to 999.

The higher your credit score, the higher the chance of the bank approving your home loan application, and the lower your interest rates on the home loan will be.

You need a credit score of at least 610 for the bank to consider your home loan application, while anything above 661 is considered a decent credit score.

Here’s a more detailed breakdown:

• 781 to 850. Excellent.
• 661 to 780. Good.
• 610 to 660. Fair.
• 500 to 610. Poor.
• 300 to 499. Very poor.

How to find out your credit record

ooba Home Loans — South Africa’s leading home loan comparison service, makes this easy with their free, online prequalification tool, the Bond Indicator. You can use this to determine your credit score, as part of determining what you can afford on a home loan.

When do you apply for a home loan?

You apply for a home loan after you and the home seller have signed the Offer to Purchase.

The Offer to Purchase is a contract that dictates the terms you and the seller have to fulfil before the purchase goes ahead.

For example, the buyer could include a clause that the seller must pay for a home inspection.

Be sure to read over the terms of the Offer to Purchase carefully, and consider seeking professional advice from an attorney.

How to apply for a home loan

You can apply through ooba Home Loans. We submit your home loan application to multiple banks so you can compare the deals they offer and choose the one best suited to your situation.

Banks have different lending criteria, and there is strong competition between banks to secure home loan customers. As such, some banks may be more willing to approve home loan applications, even when the applicant has a low credit score, and some banks will offer lower interest rates.

So it’s in your interest to apply to multiple banks through ooba Home Loans and potentially save a lot of money.