Literally translate, mortgage means ‘death-pledge’ from the Old French language in the 14th century. If a deal fails, it is the death of the pledge. Whilst it is commonly used across the world, in South Africa we tend to refer to it as a home loan.
The words ‘mortgage', ‘bond’, ‘home loan’ all have the say meaning, which are used to describe the legal arrangement between an individual/business and a finance house (bank), where it is agreed that in exchange for a loan to buy a property, the lender has the right to take that property if you fail to repay the money you’ve borrowed, plus the interest.
For many people a mortgage/home-loan is the only way possible to own a home but it’s not to be taken lightly because it is a debt, and one that can have serious consequences if you do not abide by the conditions of the lender. Here are some pros and cons that may help you decide whether taking out a home loan is for you.
Disadvantages
- You are taking on a long-term commitment to pay back the home loan amount you have borrowed, within a certain timeframe, plus interest.
- The loan and the interest equate to you paying more for the home than if you had bought it outright.
If you hit financially difficulties and cannot make your repayments, the bank has the right to take back the property and sell it to recover the outstanding balance you owe. You lose the property!
The only way around this is to speak with your lender as soon as it becomes evident that you may not be able to keep up with your repayments.
Money and property markets are prone to increases in the amount of interest you will pay, which is determined by inflation. When the interest rate increases, so too will your home loan and vice versa. This means you could be paying even more on the property than you anticipated.
If you are under 18 or over 70, although this may vary depending on the lender, you may not qualify for a home loan. In general the equity in your property will increase at a slower pace during the loan period.
Advantages
- It is a cost-effective way to borrow money, as some banks may offer you a preferential borrowing rate.
- You will be able to choose your home loan repayment period, eg: 20 or 30 years.
- You are able to pay more into the home loan, thereby reducing the repayment term.
- You are able to access any extra money you have paid into your home loan, at any time without clearance from the lender, understanding that this will likely mean paying more over time.
- You no longer have to pay rent on someone’s else’s property, meaning that money will instead be going towards ownership of your own home in the future.
- A home loan is an investment AND an asset. Home loans can be thought of as a form of savings, in which you will acquire a property that will more often than not, grow in value. Properties are considered an asset class, but be warned, a home loan is not.
- Over time, your net worth improves as you pay off more of the home loan debt.
- Depending on the property and its use, you may be eligible for tax breaks or home owner incentives.
- Having a home loan indicates to other creditors that you are potentially a good risk for credit.
- Many lenders offer their own building insurance, which may be cheaper than an independent insurer.
- You can refinance your home, or extend the term of the loan under certain conditions.
Depending on the type of home loan required, you may qualify for 100% loan.
It always pays to seek personalised advice from a financial consultant, and similarly if you have decided to take a home loan, shop around for the best terms.