So you’re thinking about purchasing a new property, and you know you’ll be needing bank finance – just what do you need to do?
Before you start shopping for a property, you need to speak to someone about the finance you will qualify for. Why? Because the amount you actually qualify for will have a significant impact on the value of the property you can purchase.
Unfortunately many buyers neglect to do this, find a house they like and make an offer – only to have their finance declined. It’s hugely disappointing for them, not to mention the seller they were buying from!
So whom do you speak to about finance? You could talk to a home loan specialist at your bank. Or you could talk to a mortgage originator who knows how all of the banks work, and what their different criteria are.
In our experience as estate agents, there is a much higher possibility of a buyer obtaining finance when they use a qualified mortgage originator. According to ooba, recent statistics show that 27% of applications declined by one bank were approved by another. That means, if you are declined at your bank there is a 27% chance, if you used a mortgage originator, your finance would have been approved at another bank. It makes a good argument for using an originator.
Something else to consider is the possibility of obtaining 100% finance. Only about 1 in 3 finance applications for 100% finance are approved. If you are able to pay a deposit of 10% or more, your chances of bond approval are about 50% greater.
One aspect of home finance buyers often neglect to consider is the loan-to-value (LTV) they will be approved for. In other words, what percentage of the total purchase price will the bank finance – which is often different from the actual Rand amount you qualify for.
For example: You may qualify for a bond of R 1 750 000. However, with all but one of the banks, when you purchase above R 1 500 000, the maximum LTV is 90%. That means, if you purchase for R 1 750 000 you will only qualify for 90% of this, being R 1 575 000 – even if your income qualifies you for more.
So make sure, as a potential purchaser, that you understand not only how much you qualify for, but also the loan-to-value from the banks.
It’s been interesting to see what interest rates the banks offer purchasers these days. Gone are the days of 2005 / 2006 where Prime -2% was common! According to ooba, over the past few months the average across the banks is Prime -0.02% for finance with a loan-to-value of less than 90%. And for finance of 90% of the purchase price or more, the average interest rate is Prime +0.58%.
Some banks are really not competitive on interest rates. We’ve actually seen offers of Prime +2%. Again – there is a good argument to use a mortgage originator as they will now which banks are competitive, not only on the LTV, but also the interest rate.
On a positive note, the Prime Lending Rate dropped by 0.5% this month. That means, for those with property finance, for every R 1 million of debt you have, your installment on a 20-year bond would have decreased by R 320 per month.
So, if you are thinking about purchasing property, speak to a qualified mortgage originator and find our how much you qualify for, what the LTV’s are and how much cash you will need for a deposit and registration and bond costs.