Home loans sound simple — until you’re applying for one.
Then, the questions start to pop up.
What’s the difference between a home loan, mortgage, and bond? Which type should you choose? And how should you balance your installment and your term?
We’re covering all of that (and more) in plain English.
Let’s get started.
What is a home loan and how does a home loan work?
What is a home loan?
A home loan is money borrowed from a bank or lender to help buy a property. The borrower repays this loan, with interest, over a set period, usually between 20 and 30 years. The property is security for the loan until it’s fully paid off. The bank or lender can take the home if the borrower doesn’t repay the full loan.
What about mortgages and bonds?
Difference between a home loan, mortgage, and bond
These three terms are often used interchangeably, but they have subtle differences:
- Home loan – The money borrowed from a lender to buy a property.
- Mortgage – The legal agreement that allows the lender to repossess (take back) the property if the borrower doesn’t repay the loan as agreed.
- Bond – In South Africa, this term refers to both the home loan and the registration of the loan against the property at the Deeds Office.
So, there are different names and slightly different meanings, but they all relate.
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Let’s look at the types of home loans you can choose from.
Types of home loans in South Africa
Different home loans are available to suit various financial needs and circumstances.
The most common types include:
- Variable-rate home loan – The most common option, where interest rates go up and down based on the prime lending rate. If interest rates drop, monthly repayments decrease, but if rates rise, repayments increase.
- Fixed-rate home loan – The interest rate is locked for a set period (typically one to five years). Which can make it more secure. But then, if interest rates drop, the borrower doesn’t benefit from lower repayments.
- Interest-only home loan – The borrower only pays interest for a certain time before starting to pay back the amount they borrowed. This makes early payments smaller but costs more in the long run.
- Access bond – Lets borrowers pay extra money into their home loan and take it out again if needed. This can lower the total interest they pay and give them more control over their money.
- Building loan – Designed for property construction, the money is released in stages as construction progresses.
- Pension-backed home loan – Instead of securing the loan against the property, it is backed by retirement savings. The loan amount is deducted from the retirement fund if repayments are missed. This option is typically available through employer retirement schemes.
- First-time homebuyer loan – Some banks offer products tailored for first-time buyers, often with reduced deposit requirements or preferential interest rates.
As you can see, there’s something for everyone — whether you’re building, buying, or just starting out.
How does a home loan work?
A home loan spreads the cost of buying a property over a long-term repayment period. When someone applies for a loan, the bank assesses their affordability based on income, expenses, and credit history. If approved, the lender provides money to buy the property. Which is then registered under the borrower’s name while the bank holds the bond as security.
Over the repayment term, usually between 20 and 30 years, the borrower repays the loan in monthly installments. These monthly payments include both the principal (the loan amount) and interest.
Example:
A R1 million home loan at an interest rate of 11.75% over 20 years would result in a monthly repayment of about R10,840. If the interest rate goes up to 13.75%, the repayment would rise to R12,438 — a difference of R1,598 per month.
That’s why it’s smart to plan for potential rate increases before committing.
Plus, there may be other costs, like insurance, legal fees, and bond registration fees. Usually, these all form part of the monthly installment.
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Home loan costs
Buying a home involves several upfront and ongoing costs.
These include:
- Bond registration fees – Fees paid to register the bond with the Deeds Office, based on the loan amount and charged according to a set tariff.
- Transfer costs – Legal fees paid to transfer property ownership, calculated on the property’s value.
- Initiation fee – A once-off fee the lender charges to process the home loan application.
- Monthly service fees – Administrative charges included in monthly repayments.
- Homeowners insurance – Mandatory cover to protect the property against damage or loss.
- Life insurance – Some lenders require borrowers to have life cover that settles the outstanding bond in the event of death or disability.
All these add up — so be sure to factor them into your budget.
Play around with online bond calculators to get an idea of how much everything could cost and how different terms affect the total cost of the home loan.
How do home loan interest rates work?
The interest rate is a percentage of the loan value that gets added to the cost of the loan each year. In South Africa, interest rates on home loans are typically linked to the prime lending rate, set by the South African Reserve Bank. If the interest rate is 11.75%, the borrower pays an extra R117,500 per year for every million rand they still owe.
Rates can either be variable or fixed:
- Variable-rate – Changes according to the prime rate. This can lead to fluctuating monthly repayments, offering potential savings when rates drop but higher payments if rates rise.
- Fixed-rate – Locked in for an agreed period, ensuring repayment certainty but potentially costing more if the prime rate decreases during the fixed period.
Lenders set interest rates based on the borrower’s credit profile, affordability, deposit size, and overall risk assessment.
High-risk borrowers, like someone with a bad credit record, get higher interest rates and pay more interest.
And people with better financial profiles get lower interest rates and pay less interest.
If you have bad credit, it may be smart to build your credit record before you decide to buy a house. Besides, it will make it easier to qualify.
That’s next…
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Do I qualify for a home loan?
To qualify for a home loan, you need a good credit score (usually above 600), steady income, and should be able to afford monthly repayments that do not take more than 30% to 35% of your total income. Most banks also require a deposit, though some offer 100% bonds for first-time buyers. You can check your eligibility using an online affordability calculator and by reviewing your credit report.
Good credit, steady income, and sensible budgeting are your tickets to approval.
Here’s how you can check.
⭐ Related content: What credit score is needed for a loan in South Africa?
How to check qualification before applying
- Use an online affordability calculator to calculate how much you could afford to borrow. Try this one from Property24.
- Get your credit report from My Score Hero, TransUnion or Experian to check your credit score.
- Apply to get pre-approved. You can use a bank or bond originator like Ooba or Betterbond before you start house hunting.
Let’s recap.
Final thoughts
It’s not quite as simple as just a loan for property, but now you know the ins and outs of home loans in South Africa.
Take these insights, check your credit, calculate your affordability, and get pre-approved. Then it’s time to start house hunting.
Remember, if you have lots of debt or a poor credit score, then you may only qualify for a loan with an expensive interest rate (or not at all).
If you want to talk to someone about managing your debt, we can help. Try our online assessment at My Debt Hero to see if you qualify to reduce your debt.
