Buying a home is always exciting and overwhelming. It is a huge investment that needs a lot of thought because a vast portion of your finances would be used, so it should be done carefully. When you are ready to buy a home, you do not have to erode your savings or undergo undue financial stress, but rather try to explore the different financial options available to buy a home in South Africa.
Financial Options To Buy A Home In South Africa
Except you’re a multi-millionaire, buying a home with just your earnings is usually not the smartest financial decision. An average individual living in South Africa will explore loans and mortgages with favorable and convenient payment plans.
- Home Loans
You can get a loan from a lender, usually a financial institution, to cover the full purchase of buying a home. The amount that you can get as a home loan depends on your financial standing and creditworthiness in the economy.
The loan will be paid in installments and interest accumulated over an agreed period until payment is completed. The title deed and other property documents will only be released to you when the loan is paid in full.
A non-resident trying to get a home in South Africa can get a loan, but the law permits you to get only 50% of the property valu1ae in a loan. So, if you were purchasing a home of R3,000,000, you could only have access to an R1,500,000 loan.
What do you need to secure a home loan?
- A source of income that matches the loan amount: You’re more likely to be granted a loan if you have a stable source of income and if the amount of income you earn annually is proportional to the loan amount you’re requesting.
- A good credit score: This will tell the bank or financial institution how much of a risk you are. Your debt repayment history, active debts, debt frequency, types of loans or credit you’ve applied for in the past all make up your credit score. How positive these responses are will be a huge determinant of whether you’ll be classified as creditworthy or not.
What Happens If You Don’t Qualify For A Home Loan?
Sometimes, no matter how badly you want a home, you cannot access financing options. If your credit score is too low to secure a viable loan, you can see the possible options below.
- Increase your credit score: You can do this by paying off all debts, reduce the frequency with which you build up debts, request a loan that fits your income level, etc. This will make you more creditworthy to financial institutions.
- Access Microloans: You can get loans from microfinance banks. The interest rates are 5% – 7% lower than banks, payment terms are much more flexible, and the protocols and criteria for qualification are less stiff.
According to the South African Reserve Bank laws, there are no legal restrictions on who can get a mortgage in South Africa and what amount you can secure. However, accessing a mortgage amount for the type of home you desire in South Africa also depends on your financial standing (creditworthiness).
If you already own a home and wish to buy another or move around, you can explore the option of re-mortgaging.
How Mortgage Works
Unlike a loan that can cover the full amount of purchasing a home, with a mortgage, you are required to pay at least 50% of the total amount, which is the same thing referred to as a down payment in the United States.
Interest rates for mortgages in South Africa are often thought to be high and are set around 10%. For non-residents looking to buy a home in South Africa, mortgage rates may be set higher at around 13%, depending on the bank or financial institution.
What Does It Cost To Get A Mortgage In South Africa?
These are the other costs involved in getting a loan in South Africa
- Bank fees: These are valuation fees, interim interest fees, mortgage initiation fees, registration fees, etc.
- Transfer duties: Can be 0%-11%. 11% is for properties that are valued above R10,000,000.
- Building Insurance: Life insurance is not compulsory in South Africa, but building insurance protects the bank from loss in the case of damage to the property, such as destructive fires or the death of the beneficiary.
- Conveyancing fees: This is the handling fee the financial institution charges for services rendered. It can cost up to R35,000 inclusive of VAT.
Typically, the terms of a mortgage in South Africa are valid for up to 30 years but ideally set at 25 years.
Other Home Financing Options
- Home Equity: Leverage the previous home payments that you’re already paying and use them to get a second home. This can have very serious tax implications, so most people don’t opt for this financing option.
- Invest in a group: You can pull funds together with friends or family members to buy a home. This can get very complicated if there are no binding contracts.
- Public programs: Some public programs are aimed at easing the financial stress of first-time homeowners. They offer services or programs such as reduced interest rates to ease the financial stress of buying a home.
- Rent To Own: This is a home financing option more suitable for younger homebuyers. It allows you to build up your home deposit as well as your credit score. Rent-to-own is a home financing option where there is a leasing agreement for a rental property for an agreed period and amount at the end of which the buyer has the option of full purchase.
- Government Subsidy: There are government programs that offer grants and subsidies to first-time homeowners, but they must fulfill certain conditions of income level, marital status, and home loan eligibility.
Home loan interest rates in South Africa are the lowest they have ever been in the last five decades, so what better time to secure a home. You can explore other means of financing the purchase of a home, including bonds. Home loans and mortgages remain the most viable methods to finance the purchase of your ideal home in South Africa. Various resources are available to learn about loans, mortgages, and other financial options to help you secure your dream home. Still, it’s best to speak to your accountant or a loan advisor. To quickly calculate loan interest and mortgage fees, you can use an online loan calculator here.