How a home loan works

The basics of home loans

When you borrow money from a bank to pay for a property, the bank pays the full selling price directly to the Seller and you, as the buyer, are then liable to pay this sum, including interest, back to the home loan provider.

After you loan application is approved you’ll sign an agreement with the bank/mortgage provider, stating the terms and conditions of the loan.

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Because the sum of money required to buy property is vast your repayments are broken down into smaller amounts and this therefore means your loan is spread over several years. Usually 20 years.

Because you are stretching your loan repayment out over a number of years the bank will charge interest on the outstanding amount.
The interest charged on a home loan is often much lower than those charged on personal loans and credit cards. Therefore you’ll find that many people prefer taking a re-advance on their current home loan to consolidate debt.

You begin paying interest on your home loan amount as soon as your bond has been registered. The interest payments in included in your monthly bond repayment.

In the early stages of your bond a greater percentage your home loan installments will go towards paying interest, but as you draw closer to the end of the loan you’ll mostly be paying off the capital amount.

Your interest repayments are dependent on two things:
The amount of time you take to pay off your loan and,
The interest rates offered to you by the home loan provider.

An interest rate of up to 2% below prime is considered top rate. Banks will usually offer these rates to people who have a very good credit rating or to customers who are interested in switching their Home Loans from other banks.

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