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Type of Mortgage Finance Bonds

Type of Mortgage Finance Bonds

Standard Home Loan

All Mortge bonds / Home Loans in South Africa have a 20 year loan term (In other circumstances 30 years). The bond repayments must be serviced from a SA rand denominated bank account.

For contract workers, immigrants and refugees a loan amount of up to 100% of the value can be approved. Sometimes, in exceptional cases, loans of >100% LTV are approved.

For non-residents, a maximum loan amount is up to 50%

Conventional mortgages in South Africa are generally fully amortized. This means that the regular principal and interest payment will pay off the loan in the number of payments stipulated on the note. Recently, interest-only mortgages have been introduced and are now available in South Africa through some institutions.

Mortgages are described by the length of time for repayment and whether the interest rate is fixed or adjustable. Most conventional mortgages have time frames of 15-30 years and may be either fixed interest rate or variable interest rate.

The most common mortgages provide for 20 years repayment duration at variable interest rate. There is a marked difference between the fixed interest mortgages and variable interest mortgage

Fixed interest mortgage

With fixed-rate mortgage, the interest rate stays constant during the life of the loan. This makes sure that your monthly payments do not change over the duration of the bond.

Variable rate mortgage (VRM)

The interest rate changes periodically in reaction to changes in prime lending rate that is determined by the repo rate. The repo rate is adjusted periodically by the Monetary Policy Committee of the Reserve Bank of South Africa depending on the economic conditions prevailing in the country.

The monthly payments can therefore go up or down accordingly. The initial interest rates for Variable rate mortgages are generally lower than those of fixed-rate mortgages. This makes the VRM easier on your payments at first than the fixed-rate mortgages for the same amount. It also helps you qualify for a larger loan because lenders sometimes make this decision on the basis of your current income and the first year’s payments.

In addition, you can still fix your variable rate mortgage for a period of time after you have already started the payments. The lender will in most cases agree to sit with you and fixed the interest rates for a specific period e.g. 2, 5, or 10 years over which any changes in the interest rates will not affect you. This means that if the prevailing prime lending rate is higher than your fixed-rate, you pay less than you could otherwise have paid; similarly if the prime rate is lower than your fixed rate, you pay more! This is recommended when the prime lending rate is volatile so as to give you a steady and constant monthly repayment over the duration specified.

Against these advantages, you have to discern risk that an increase in interest rate would lead to higher monthly repayments.

Consider the following issues with a Variable Rate Mortgage (VRM)

    1. Is your income likely to rise enough to cover higher mortgage payments if the interest rates go up?
    2. Will you be taking on other sizeable debts, such as car loan or school tuition in the near future?
    3. How long do you plan to own this home? If you plan on selling soon, rising interest rates may not pose the problem; they would if you plan to own the house for a long time.
    4. Can your payments increase even if interest rates generally do not increase?
    5. How often will the mortgage be adjusted? One year? Three years? The longer the adjustment period, the better you will be able to plan your future expenses.
    6. What is the initial mortgage rate? Does it include a special discount? Is there an increase in your monthly payments when your rate is adjusted for the first time?
    7. Is there a repayment penalty if you sell your house and pay off the loan early?

This rarely occurs. If it does, the process is rigorous and almost always applies to commercial property

Capped Rate Home Loan

Unless the customer has existing investments in the country. Contract workers and their customers receive a 100% loan; when they leave the country they will be responsible for advising that they are now non-resident and the loan amount will be adjusted accordingly.

The normal home loan concession applies, there are no premiums added to the account.

There is no maximum loan amount

The normal home loan costs apply, however there is a cost for the submission to Exchange control

Access bond is not available to non-resident customers, however contract workers, refugees and immigrants will be allowed the facility