Things to Consider Before Accepting a 105% Home Loan

Many South Africans have to think twice before applying for a home loan because certain factors prevent them from buying a house.

Firstly, potential buyers do not have enough money to pay the fees associated with buying a house. Secondly, South Africans are not great at saving.

With the cost of living being at an all-time high, it is not surprising. To help fix this problem, banks like ABSA launched options that allow buyers to apply for a 105% home loan.

It might sound beneficial but there are a few things to consider before accepting it:

How does it work?

ABSA is one of the banks that offer this option. Their Young Professionals programme allows buyers under the age of 35 years to apply for a home loan of up to 105% with a maximum purchase price of R1.5 million.

This effectively means that buyers can apply for a 100% home loan, which will cover the cost of the house and the extra 5% can cover the extra fees like bond registration costs.

The total amount is then worked into monthly bond instalments like a normal bond. 

What are the benefits of the 105% home loan?

The goal of this option is to make it easier for younger buyers to buy their dream home and to enter the real estate market.

Young people are often at a disadvantage compared to older buyers because they have only started their careers. This means that they might not have the financial resources or savings needed to purchase a house.

With the current interest rate at 7%, young people are scrambling to buy a home. The 105% home loan option makes it possible for them to reap the rewards of the low interest rate. 

What are the risks of the 105% home loan?

Even though a 105% home loan seems like the obvious route for many people, there are a lot of things that potential buyers need to consider before accepting.

Even though this option does allow young buyers to get a foot in the real estate door, but it also means that their monthly repayments will be higher.

Buyers are not only paying back 100% of the bond but an extra 5%. It might not sound like it is that much but it will make a difference once they become homeowners. 

For example: a buyer who accepts a R1.5 million home loan over 20 years at the current interest rate of 7% will pay back roughly R11,600 per month. If the home loan is 5% more, the loan amount will jump up to R1.575 million, whereby the monthly instalments will jump to about R12,300 per month.

The buyer then has to pay back R700 more. That means that the household will have to function with R700 less per month. It might mean cutbacks on luxuries, outings, or even the bare necessities. For some, this might lead to a change in lifestyle. 

A final word

A home loan is the same as any other debt that you incur. The sooner you pay off the interest, the better.

An added 5% to your home loan also means added interest, not just added capital. You need to ask yourself whether you can afford it on top of the 100% home loan you already have to settle.

It would be a good idea to work with a mortgage originator or a professional real estate agent. They will give you expert advice and help you determine what the best course of action would be.

Do enough research before applying and make sure that you have enough information about the loan you want to apply for.