- A home loan is when a lender (usually a bank) funds a property purchase on your behalf, so you don’t have to pay the full value of the home loan upfront.
- You pay back the lender in instalments over a set period of time, with the home loan interest rate determining how much you pay them above and beyond the value of the property.
- Measures that will earn you a more favourable interest rate include paying a deposit on the purchase, clearing your credit record, and shopping around for banks that offer the best deals.
A home is a significant investment, and the average person will not be able to pay the full value upfront. Hence the importance of home loans, which makes home ownership a realistic option for the many, not just the few.
This guide to home loans shows that the dream of homeownership is not so distant a prospect as you may think.
What is a home loan?
Rather than pay the full value of a property upfront; you can get a lender, usually a bank, to finance the property purchase for you. The loan they provide you with to fund the property is referred to as a home loan.
You’ll pay them back the value of the home loan plus interest, in instalments over a set period of time. The bank retains possession of the title deed for the property until you have fully paid back the home loan.
So the two primary elements of the home loan are:
- The repayment period: This is the amount of time the bank has given you to repay the loan. This will usually be either 20 or 30 years, although it is possible to pay off a bond in 10 years.
- The home loan interest rate: This is basically the bank’s way of charging you for the risk they’re taking by providing you with a loan. That charge is added to each instalment you pay back on the home loan, and the interest rate determines how much additional charge that will be.
Securing a home loan is a critical part of the home buying process. Once you’ve found your dream home, you apply for a home loan, either directly through the bank, or with the assistance of a home loan comparison service like ooba home loans, who can apply to multiple banks on your behalf.
The bank may approve or reject your application. If the bank declines your home loan application, it’s not the end of the world, as ooba home loans have been successful in securing home loan financing for one in every three applications that are initially turned down by a bank.
Either way, finding the right home loan deal is almost as important as finding the right home, as a good home loan deal can save you a lot of money in the long run.
What is a ‘good’ home loan deal?
If you’re comparing various home loans, and you aren’t sure what makes one package better or worse than another, look at the interest rates. The interest rate determines how much you’re going to have to pay the bank over the course of the loan period, above and beyond the actual value of the home loan itself.
The primary factors that affect the interest rates of a home loan are:
- The current prime interest rate which is linked to the South African Reserve Bank (SARB) REPO rate.
- The lending criteria of the particular bank you’re applying to, and how much of a risk factor that bank considers you to be (this is determined by your credit score).
Measures you can take to obtain more favourable interest rates include:
- Paying a deposit on the property. The deposit is the portion of the house price you’re paying up front. Obviously, the bigger your deposit, the smaller the home loan you will need, the less you’ll have to pay back over the remaining loan period, and consequently, the less of a risk you are to the bank.
- Clearing your credit record. A better credit score makes you less of a risk to the bank.
- Shopping around for banks with better deals. Since the lending criteria varies from one bank to another, you may be able to find a bank with a home loan package that is especially suited to your particular financial situation.
Who are the best banks for home loans in SA?
Home loan interest rates may vary depending on the lending criteria of the bank, as well as the financial situation of the applicant. As such, it’s difficult to provide a definitive answer to the question of which bank is best for home loans, as it may be different for each applicant.
However, one can look at the general performance and customer satisfaction ratings for South African banks to get an idea of which ones have the highest quality service, and the best understanding of their customer’s needs.
The South African Consumer Satisfaction Index for the country’s retail banks, compiled by consulting group Consulta, serves as an invaluable guide for determining just that. According to Consulta, it is the largest and most comprehensive survey of its kind for the South African banking sector.
Capitec, FNB and Nedbank lead the way in customer satisfaction
The survey published in early 2019 showed Capitec, FNB and Nedbank as the leaders in overall customer satisfaction, with Capitec and FNB also scoring high for customer expectation, indicating consistent performance levels over a prolonged period.
Standard Bank shows the most improvement
Standard Bank showed the biggest improvement in customer perception, with an increase of +5.1 index points since 2016. Furthermore, they have recently introduced an innovative new price structure for home loans, where the loan is divided into three portions, each one being priced individually, with a decreasing interest rate in the 2nd and 3rd portions. As the client pays off their loan, the interest rate will gradually decrease over the course of the bond, resulting in significant long-term savings.
FNB rated as the best bank among South African youth
Meanwhile, a survey conducted by The Sunday Times found FNB to be the most popular bank among SA youth. This is particularly relevant to many prospective first-time home buyers looking to get onto the property ladder, as they are more likely to fall into the younger age groups.
As a first-time home buyer who lacks the necessary funds for a deposit, you can also apply for a 100% home loan (where your home is entirely funded by the bank, no deposit required). South Africa’s largest home loan comparison service, ooba home loans, has a strong track record of securing 100% home loans for clients, with three out of four applications being successful.
Should you apply for a home loan directly through your bank?
Applying for a home loan through your private banker may not necessarily get you the best deal, as your banker’s first priority is to get the best deal for the bank. Furthermore, if the application gets rejected, you will either have to apply to a different bank, or wait around until circumstances with you or your bank change. Meanwhile, the clock is ticking on your offer to purchase, and you may end up losing the home you have your heart set on.
Fortunately, you have alternatives, in the form of a home loan comparison service. A home loan comparison service helps streamline the home application process and deals with banks on your behalf. Rather than apply directly to your bank and hope for the best, you can have a home loan comparison service apply to multiple banks, including your own, increasing your options and improving your chances of bond approval.
In addition to dealing with multiple banks on your behalf; ooba home loans provides a prequalification service that will help you determine how much you can afford, while also providing certification that will improve your chances of qualifying for a home loan.
You can obtain prequalification either by being independently verified by an expert, or by using ooba home loans’ online prequalification tool, the ooba Bond Indicator. Then, once you’ve found a home that meets your requirements, you can apply for a home loan.