Here’s why you may not want a 100% home loan

It’s not easy to achieve, but about 38% of homebuyers are currently still being granted no-deposit or 100% home loans – and in some instances loans that not only cover the whole purchase price of their new home but their transfer fees and bond registration costs as well.

These costs, including transfer duty where applicable, bond registration charges and legal fees, currently work out to between 4,5% and 5,5% of the purchase price, so the purchaser of a R500 000 home, for example, would need a loan of around R527 000 to cover the full price plus costs.

However, while such loans – which are mostly granted to buyers in the affordable homes sector - may come as a relief for those who are tight on cash, there is always a risk involved in borrowing more than a property is currently worth, says Shaun Rademeyer, CEO of BetterLife Home Loans, SA’s largest mortgage originator.

“The problem is that for almost five years, the loan capital will hardly diminish for the homeowner who is able to make only the minimum monthly payments. And what that means is that if the owner is for any reason forced to sell within that period, he or she might actually have to pay-in quite a lot of cash to clear the loan and any accumulated interest.”

This is especially a worry now, he says, when home prices are rising only slowly, and in the light of the fact that no-deposit loans usually come at monthly interest rates above prime, because these factors inhibit the ability of homeowners to grow their equity in the property.

“On the other hand, the buyer who puts down a good deposit and uses cash to pay the transfer costs will usually be able to negotiate a lower interest rate – and will immediately start building equity in his or her home.

“Such buyers will not have to wait for the value of their home to catch up to the value of their loan and will be well placed for an upgrade to a larger home or better area, when their turn comes to sell and move on.

“This shows why prospective buyers should thoroughly discuss all their home financing options with a professional home loan consultant before deciding to accept a no-deposit loan.

“The consultants at BetterLife Home Loans, for example, will take them through all the pros and cons of various home loan packages available from the different banks and also consider their particular financial circumstances before making a recommendation.”

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