Counting the cost of buying of a home

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21 Feb 2013

Buyers are often advised to budget properly for costs associated with buying a new home to ensure they meet the affordability requirements when applying for a home loan and also to ensure they will financially afford repaying the mortgage.

Interest rate refers to the amount charged and is expressed as a percentage of the principal by the bank to the borrower for the use of that amount or asset.

In Banks and your home loan application, home loan bankers pointed to affordability as a major constraint for many buyers.

Although some people manage to obtain finance, a change in their financial situation often lands them in deeper financial trouble as revealed by Statistics South Africa that jobless consumers are over-indebted.

Timothy Akinnusi, head of sales and customer management at Nedbank Home Loans, explains that in November 2012, Nedbank and other banks reached an agreement with the Minister of Finance, Pravin Gordhan, National Treasury, Banking Association of South Africa, South African Reserve Bank and Financial Services Board to improve responsible lending and prevent households from being caught in a debt spiral.

Many of these actions were already demonstrated in Nedbank’s own processes and continued commitment to responsible lending.

“We continue to focus on internal application channels such as our online application channel, as a way to create efficiency and reduce the cost of acquiring a loan for clients' benefit,” he says.

Home buying costs

Absa Home Loans says consumers and would-be home buyers need to be aware of other typical costs they will incur when buying a house.

Arrie Rautenbach, Absa head for retail markets points these out:

Deposit

A down payment or partial payment made at the time of the property purchase. The difference between the purchase price and deposit is the home loan and the deposit requirement will differ from one bank to another, he says.

Registration costs

This includes the attorney’s fees for registering the home loan including stamp duty, postage, conveyancing fees and VAT.

A deposit is down payment or partial payment made at the time of the property purchase.

Transfer fees

This is the amount of money or fee paid to the attorney who processes the transfer of the property and is calculated on a sliding scale based on the amount of the home loan.

Initiation fee

A once-off fee charged by the bank in order to generate the home loan and equates to 10 percent of the loan amount with a maximum of R5 000 + VAT.

FNB and Standard bank say they charge a once-off fee of R5 700.

Deeds Office fee

Fees charged by the Deeds Office for registering the new ownership of the property.

According to Ewald Kellerman, head of sales at FNB Home Loans, on top of the above, buyers need to consider moving costs, possible cancellation and selling commission on the previous property and deposit for rates in taxes.

Interest rates

In 10 reasons why you should buy property, I pointed out that when I first got into the game, I was not as savvy as I am becoming these days, and every article I write and new information I come across is a learning exercise.

The most important lesson I have since learnt is that when borrowing, I need to understand the interest rate that is being charged on the loan I am taking.

When buying a home, the bank will charge you a home loan interest rate and there is of course an option to take the variable interest rate or fixed interest rate.

Interest rate refers to the amount charged and is expressed as a percentage of the principal by the bank to the borrower for the use of that amount or asset.

If you are going to be naive as I was, the section on the cost of credit on the home loan agreement document should be your priority.

In assessing home loan applications, bankers have revealed that some applicants are low-risk while others are high-risk borrowers.

So when the borrower falls in the low-risk profile, the bank will usually be charged a low interest rate; if the borrower is considered high risk, the interest rate that they are charged will be higher.

So when you get a call from the bank that you have successfully qualified for the home loan, make sure you ask as many questions about interest rates as possible so you know exactly what the costs are.

I have to admit, I was so excited when I bought my first property that I totally ignored reading all the fine print in the 12 pages of my home loan agreement.

Of course, it contains a whole lot of legal language which to many means nothing, and if you are going to be naive as I was, the section on the cost of credit should be your priority.

Variable interest rates

According to Kellerman, variable interest rates are linked to the prime lending rate determined by the South African Reserve Bank.

The prime lending rate can change based on the outcome of the Monetary Policy Committee (MPC) meetings.

He says the MPC moves rates, up or down, to try to keep the economy stable and keep consumer price inflation within the target band.

Rautenbach says a change in the prime lending rate will result in a proportional change in the interest a consumer pays on their mortgage loan, which results in mortgage repayments either increasing or decreasing.

He says the advantage of opting for a variable interest rate is that consumers get the immediate and full benefit of a cut in interest rates, while they may at any time switch to a fixed-rate contract in an attempt to hedge interest rate risk.

The disadvantage, however, is that they feel the immediate and full impact of any increase in interest rates.

Fixed interest rate

Kellerman explains that a fixed rate is a product that banks offer to give a customer a level of certainty on the monthly repayment that they are responsible for.

The decision to fix or not to fix one’s mortgage interest rate will depend on consumers’ personal financial position, trends and developments regarding various macroeconomics.

“These rates are typically charged at a premium (more expensive), but guarantees a level repayment for the fixed rate term.”

The fixed mortgage interest rate agreement may not be terminated prior to the expiry of the contracted term of the agreement, points out Rautenbach.

“The implication of withdrawing from the contract before the expiry date is the payment of a penalty fee, which is stipulated in the agreement.”

 Currently, Absa offers customers fixed mortgage interest rates for periods of 12 or 24 months.

Advantages

He says a fixed mortgage interest rate will not increase when other interest rates rise.

This gives consumers peace of mind with regard to future mortgage repayments and allows the customer to plan and budget more accurately and facilitates future cash flow management.

“Customers may revert to the variable interest rate after the fixed-rate contract has expired, or may decide on a new fixed-rate contract, depending on their personal financial circumstances and views of the future interest rate cycle.”

Disadvantages

 A fixed mortgage rate may well be above the variable interest rate for the full term of the fixed-rate contract, says Rautenbach.

The gap between fixed and variable interest rates may widen if variable interest rates fall during the term of a fixed-rate contract.

He says customers are locked in for the full term of a fixed-rate contract and if their circumstances change and they need to exit the fixed-rate contract early, a penalty fee will apply.

“The decision to fix or not to fix one’s mortgage interest rate rests entirely with the consumer.”

This decision will depend on consumers’ personal financial position, trends and developments regarding various macroeconomic and other external factors which may impact on interest rates and, ultimately the consumers' view of the timing, magnitude and frequency of future interest rate adjustments, he points out.

Consumers' decisions will also be influenced by expectations regarding the duration of any upward or downward adjustment in interest rates, he says.

In the final series in this article, we will look at home loan administration fees, insurance and loan cancellation penalty fees. – Denise Mhlanga

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