Buying a house is one of the biggest financial commitments most people will ever make. For many, it is the first large asset they will own. Most people do not have enough money to buy a house without a loan. Usually, you borrow from a lender who fronts you the money for a house, the house will belong to you, but will be used as security for the loan.
Mortgages are large loans that create a long-term obligation for you. The Lender pays the money to the Seller of the house. This payment to the Seller is the loan that is registered against the title and your name with the Lender. It is usually paid back to the Lender over many years.
Every loan is given by the Lender with the intention that it (the Lender) gets the money back, and every loan is taken with the intention of paying it back. The Lender will therefore only lend you an amount that you can afford to pay back usually based on checks into your monthly salary and other sources of regular income. Circumstances may change in your life that might affect you financially. Nevertheless, the requirement to repay the loan remains unchanged, and it must be fully paid off.
People purchase houses for various reasons, but primarily, because it provides housing security, while creating an asset you own; one that will almost always grow in value, especially, if you look after it properly. Home ownership creates the basis of a legacy to leave to your spouse and children, as it becomes part of your estate. The property then belongs to you and will be registered in your name and you cannot cancel the mortgage or housing loan agreement.
Once you have bought the house, it is your duty and obligation to look after the property, maintain it, and repair it as and when it is needed. Although the Lender might have lent you the money, the house belongs to you and you need to make sure it is always in good condition so that it retains its value.
You will also have to pay the property and other taxes as well as for utilities such as water and lights, if these charges are applicable in your area.
Ownership also means that you can add on to the property, make changes, and even sell it. Although, if you sell it, you will need to advise the Lender first, and you must repay all monies due to the Lender out of the proceeds.
Home Loan Agreement
The home loan agreement, also known as the Deed Agreement, is the agreement that you sign with the Lender that lists the terms and conditions under which you have borrowed money to buy the house and all the obligations that you and the Lender (the Parties) must fulfill. The loan agreement is legally binding, so you should be fully aware of the terms and conditions set within before appending your signature to it. Most loan agreements include the following:
The Loan Amount
Also called the Principal Debt is the amount of money borrowed from the Lender to secure the new home or to make major changes to your existing home (depending on the type of housing loan you take). It is usually the purchase price of the house sans any deposit that may be required. This amount is fully determined by the value of the property, which in turn, depends on the valuation given by property Valuers taking into account such things as the location of the property, the building materials involved in its construction, etc. Other administrative charges may be added to the Principal Debt.
Term of the Loan
Period of time over which the loan should be paid back to the Lender; usually about 20 years of your productive work life (You don’t pay during your pension years). You might also have the option of paying it back in a shorter space of time by paying larger installments, but this will require you to advise the Lender in writing of your intentions in advance. The lender may charge an early redemption fee.
You repay the Lender in monthly installments. The Lender will advise you what the installments are, and what is included (interest rates and other charges). It is possible and advisable to pay more than the stipulated installment every month, as this enables you to repay the loan sooner. To make it easier, and to ensure that the installment is paid every month, on time, the Lender will set up a debit or standing order against your account to service the loan.
You may be required to open an account with the Lender from which monthly installments will be drawn. You will pay the monthly installments for the life of the loan term unless you are able to pay it off in a shorter time, or sell the house and pay the balance of the loan with the proceeds of the sale.
The full installment must be paid on the same day every month. The due date or payment date is written in the loan agreement, and is always the same date every month. The loan must be repaid monthly, on or before the due date.
Interest Rate Charged
Interest rates can be as high as 35-40% per annum. These can either be fixed or variable depending on the Lender you go with.
Consequences of late payment
If the payment is late, the loan will be in arrears. Should this happen, an additional penalty interest on the arrears accrued shall be owed.
Consequences of Default
You should always bear in mind, if you default on your home loan, you will lose your house, and all the money you have paid for it to the time of default. The Lender will contact you to make arrangements to settle the arrears. If you ignore the attempt to contact you, you’ll only worsen your situation. If the Lender cannot recover the money owed, they can repossess the house and may sell it to recover the outstanding balance.
There are different types of mortgages or housing loans, we have tried to cover what is general to all of them, but before going for one, you need to be sure to ask what the Lender’s different packages are and find which one best suits your needs. Also, it is not a bad idea to talk to multiple Lenders so you can compare them and choose which of them has affordable rates or an overall better package than the other. Owning a home should be a fundamental right, and if you are financially capable of making the payments on time over the term of the mortgage, go for it and enjoy the pleasures of owning and living in your own home.