The 100% home loan which covers the costs of transfer too is not the Holy Grail it’s thought to be.
These costs, including transfer duty where applicable, bond registration charges and legal fees, currently work out to between 4,5% and 5,5% of the purchase price, so the buyer of a R500,000 home, for example, would need a loan of around R527,000 to cover the full price plus costs.
Though around 38% of all applicants qualify for 100% loans, and while such loans may come as a relief for qualifying buyers who are tight on cash – and especially for first-time buyers – there is a definite risk to borrowing more than the property is worth, according to Shaun Rademeyer, CEO of BetterLife Home Loans, SA’s largest mortgage originator.
“The problem is that for almost five years, the loan capital will hardly diminish for the homeowner who is able to make only the minimum monthly payments,” he says. “And what that means is that if the owner for any reason is forced to sell within that period, he or she might actually have to pay in quite a lot of cash to clear the loan and any accumulated interest.”
Slow growth, more pronounced
This is especially a concern now with home prices rising slowly and in the light of the fact that no-deposit loans usually come at monthly interest rates above prime, because these factors inhibit the ability of homeowners to grow their equity in the property.
“On the other hand, the buyer who puts down a good deposit and uses cash to pay the transfer costs will usually be able to negotiate a lower interest rate – and will immediately start building equity in his or her home,” says Rademeyer. “Such buyers will not have to wait for the value of their home to catch up to the value of their loan and will be well placed for an upgrade to a larger home or better area, when their turn comes to sell and move on.
“This shows why prospective buyers should thoroughly discuss all their home financing options with a professional home loan consultant before deciding to accept a no-deposit loan.
“The consultants at BetterLife Home Loans, for example, will take them through all the pros and cons of various home loan packages available from the different banks and also consider their particular financial circumstances before making a recommendation.”
For more, visit BetterLife Home Loans.