<\/p>\n
A home loan solution from FNB, which it describes as a \u2018market first\u2019, may seem appealing for graduates and young professionals eager to own their first home, but there are more than a few potential pitfalls.<\/p>\n
The key is understanding exactly which trade-offs you are making and how they may affect repayments over the full term of the loan.<\/p>\n
Read:\u00a0Even homeowners in default of their mortgage loans have rights, says court<\/p>\n
The bank\u2019s solution for under-35s (who hold an NQF Level 5 qualification or higher) includes what it describes as \u201cvaluable benefits\u201d, including:<\/p>\n
The first and second of these \u201cbenefits\u201d may appear attractive, but they are far less appealing on closer inspection (more on that, shortly).<\/p>\n
A further three of the listed benefits (with the exception of the smooth repayment transition) are available to most home loan applicants at the bank and aren\u2019t unique to this product at all.<\/p>\n
For example, it offers the 50% discount on all loan applications made directly through nav \u00bb Home on the FNB app.<\/p>\n
Typically, loans at 110% of a house\u2019s value mean you\u2019re effectively capitalising purchase-related expenses (such as bond registration costs, property transfer costs, transfer duty and deeds office levies) and paying these off \u2013 plus interest \u2013 over the period of the home loan (generally, 20 years).<\/p>\n
ADVERTISEMENT<\/p>\n
CONTINUE READING BELOW<\/p>\n<\/div>\n<\/div>\n
\nThis is also not a good idea simply because you start off underwater, in other words, owing more than the value of your property.<\/p>\n<\/blockquote>\n
The capital repayment holiday looks appealing as you\u2019ll start off paying a noticeably lower monthly amount for two years, but you\u2019re not building any equity over this time.<\/p>\n
On a R1.5 million home loan for a property valued at this amount, you still owe R1.5 million after 24 months. This means you only have 18 years (on a 20-year mortgage) to pay back this capital amount, resulting in a higher monthly payment given the shorter time horizon.<\/p>\n
In this hypothetical example, using a base scenario (normal repayment at prime (currently 10.25%) + 1%, and assuming no changes in interest rates over time (rather unlikely), our homebuyer will pay back a total of R3.77 million, of which R2.27 million is interest over the 20 years.<\/p>\n
\n\n
\n \n Base scenario<\/strong><\/td>\n Capital repayment \u2018holiday\u2019 scenarios<\/strong><\/td>\n<\/tr>\n \n \n \u00a0Prime + 1%<\/strong><\/td>\n Prime + 1%<\/strong><\/td>\n Prime<\/strong><\/td>\n Prime \u2013 1%<\/strong><\/td>\n<\/tr>\n \n Repayment \u2018holiday\u2019 interest rate<\/td>\n N\/A<\/td>\n 11.25%<\/td>\n 10.25%<\/td>\n 9.25%<\/td>\n<\/tr>\n \n Post-repayment \u2018holiday\u2019 interest rate<\/td>\n 11.25%<\/td>\n 11.25%<\/td>\n 11.25%<\/td>\n 11.25%<\/td>\n<\/tr>\n \n Monthly payment (years 1 and 2)<\/td>\n \u00a0R15\u00a0739<\/td>\n \u00a0R14\u00a0062<\/td>\n \u00a0R12\u00a0813<\/td>\n \u00a0R11\u00a0563<\/td>\n<\/tr>\n \n Monthly payment (years 3 to 20)<\/td>\n \u00a0R15\u00a0739<\/td>\n \u00a0R16\u00a0224<\/td>\n \u00a0R16\u00a0224<\/td>\n \u00a0R16\u00a0224<\/td>\n<\/tr>\n \n Total interest<\/td>\n \u00a0R2\u00a0277\u00a0322<\/td>\n \u00a0R2\u00a0341\u00a0950<\/td>\n \u00a0R2\u00a0311\u00a0950<\/td>\n \u00a0R2\u00a0281\u00a0950<\/td>\n<\/tr>\n \n Total repaid<\/td>\n \u00a0R3\u00a0777\u00a0322<\/td>\n \u00a0R3\u00a0841\u00a0950<\/td>\n \u00a0R3\u00a0811\u00a0950<\/td>\n \u00a0R3\u00a0781\u00a0950<\/td>\n<\/tr>\n \n Extra amount repaid vs base scenario<\/td>\n \u00a0N\/A<\/td>\n \u00a0R64\u00a0628<\/td>\n \u00a0R34\u00a0628<\/td>\n \u00a0R4 628<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n Their monthly repayment will be around R15\u00a0700, excluding any other fees. Obviously, a situation where you\u2019re only paying interest for the first two years will result in a lower monthly payment.<\/p>\n
Even at the same interest rate, this will be around R14\u00a0000, a saving of R1\u00a0700. However, FNB is offering a \u201cmore tailored and competitive fixed interest rate\u201d for that period.<\/p>\n
Let\u2019s assume our homebuyer is offered the prime rate (pretty competitive!). This will see their repayment drop to R12 800 over 24 months, which is nearly R3 000 lower than they would ordinarily pay.<\/p>\n
\n\nADVERTISEMENT:<\/p>\n
CONTINUE READING BELOW<\/p>\n<\/div>\n<\/div>\n
But, by deferring the capital owed for 24 months, they\u2019ll end up paying an additional R35 000 in interest over the full period of the home loan.<\/p>\n
\nIt may be true that a R3 000 lower monthly repayment to start will aid this household\u2019s cash flow tremendously. But will they be able to afford a nearly R3 500 jump after two years?<\/p>\n<\/blockquote>\n
FNB speaks of a \u201csmooth repayment transition,\u201d but offers no further details.<\/p>\n
This will likely mirror allowances that it and other banks make for struggling homeowners who may be between jobs (it is also similar to payment break schemes offered during the Covid-19 pandemic).<\/p>\n
Read: Covid-19 payment holidays lead to rise in credit balances and delinquencies<\/p>\n
What will likely happen is that the repayment amount will ramp up over three to six months, starting in month 25.<\/p>\n
This will actually result in an even higher monthly repayment for the remainder of the loan, as less capital will have been repaid by month 31 than ought to have been.<\/p>\n<\/p><\/div>\n
#Beware #home #loans #payback #holiday #upfront<\/p>\n","protected":false},"excerpt":{"rendered":"
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