What does a home loan entail?
Category Money
"A home loan* is a relatively simple way for buyers to get financial assistance when purchasing a property," says Julie Költzow, Property to Link's Bond Originator.
"Individuals can apply for a loan at numerous banks or any other financial institutions if they do not have the necessary funds to pay the entire cost of a property upfront."
What steps should a future homeowner follow to qualify for a home loan? Julie explains:
- Home loan application
The first step is to apply for a home loan with a lender. The lender will require various documents, including proof of income, identification, property documents and other relevant information.
- Home loan approval
The lender evaluates the applicant's creditworthiness, income and other factors to determine if they qualify for the loan. If the loan gets approved, the lender will specify the loan amount, interest rate and repayment terms.
- Deposit
Homebuyers are sometimes required to pay a deposit, which is a percentage of the property's total value. The deposit amount can vary depending on the lender's policies and the borrower's financial situation.
- Interest rates
Home loans are either fixed or they are issued with variable interest rates. A fixed rate loan maintains the same interest rate throughout the loan term. With a variable rate, on the other hand, the interest rate may fluctuate based on market conditions.
Fixed rates are usually higher than the variable rates and fixed for a period of five years only (depending on policies).
- Repayment
Borrowers repay the home loan in regular instalments over the loan term, which can span over several years (usually 20 years). Each instalment consists of both principal and interest components.
- Collateral
In most cases, the property being purchased serves as collateral for the home loan. If the borrower defaults on the loan, the lender can take possession of the property through foreclosure.
- Closing
Once all the necessary documentation and formalities are completed, the home loan is finalized and the property ownership is transferred to the borrower.
It is essential to compare different home loan offers from various lenders to find the most favourable terms, interest rates and repayment options.
Additionally, potential homebuyers should consider their financial situation carefully to ensure that they can comfortably manage the loan payments throughout the loan term.
* Also referred to as a bond, mortgage or housing loan.
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Author: Machelene Joubert