A Comprehensive Guide to Home Loans vs Building Loans in South Africa

Are you in the market for a loan to build your dream home in South Africa, but can’t seem to make sense of what exactly a home loan vs building loan is? Well, you’re not alone! When we first started looking at building our home, we had no idea what the difference between the two was and which one would suit our needs best. In this article, we’ll take you through the ins and outs of Home Loans vs Building Loans in South Africa so that you can make an informed decision about what’s right for you.

What’s the difference between a home loan and a building loan?

Home loans are typically used to purchase an existing home, while building loans are used to finance the construction of a new home. The loan you choose to apply for will ultimately depend on whether you want to buy an existing home or build your dream home.

The main difference between the two is that with a home loan, you’ll receive the full amount of the loan upfront and make regular payments over time. With a building loan, you’ll only receive funds as needed during the building process, and your monthly repayments will be based on how much of the loan has been already been drawn down.

Overall, both types of loans can be useful for financing your new home; it just depends on what type of property you’re looking for and what kind of repayment schedule works best for you.

The Process of Getting a Building Loan Vs a Home Loan

The process of applying for a home loan vs a building loan also differs in that the banks have different requirements for each of these loans. This can add a layer of complexity when applying for your loan.

Requirements for a Building Loan Application

In order for apply for a building loan application, you need to do quite a lot of the legwork already. If you are buying plot and plan through a developer (where you buy the stand, the house has already been designed and the building team is in place), the documents needed for the application are a little easier to pull together.

If you are planning on self building, as we did, you will need to have already outlaid some funds and have some things in place before applying for your building loan.

The bank will want to understand your financial situation first and foremost. So, you will need to provide:

• three months’ bank statements and salary slips
• a copy of your ID and proof of residence
• to have your credit record checked

If you are self employed this can be a bit more complex but it is definitely not impossible. You may have some more hoops to jump through to help the bank understand your financial situation but it can be done!

Once the bank established your finances, they also want to understand the scope of the project they will be financing. To do this, you will need to submit the following documents:

• municipal approved building and site plans – you’ll need to engage an architect to design your home and have the plans submitted to municipality. This will take a minimum of 4 weeks but the design stage can take even longer.
• a detailed building contract and schedule of finishes from your builder – if you are building through a developer, this is relatively quick and easy.
• proof that the builder is registered with the NHBRC – The NHBRC ensures that all builders build to a certain standard. Your bank will only approve building loans if your builder is NHBRC registered.
• an all-risks insurance policy for the construction – A once off fee that is paid for your specific erf and build
• a waiver of builder’s lien in favour of the bank from the builder – This is a document that states that the contractor will give up his right to control and possess a property or withhold the keys if he is not paid in full when the Employer asks for them. It is a legal document.

Requirements for a Home Loan Application

Getting a home loan or bond for an existing house is a slightly easier process. The banks will want to establish your financial integrity and your ability to pay back the loan.

So, you will need to submit the following documents:

• three months’ bank statements and salary slips
• a copy of your ID and proof of residence
• to have your credit record checked

Then you will also need to submit the offer to purchase on the home. This document should include the full purchase price of the home, the deposit you will be paying toward the home, any additional costs associated with the purchase and details about the seller.

How long does it take for a building loan to be approved by the bank?

Once all the documents have been submitted and approved, you should receive an offer from the bank within a week or two. The offer will include the loan amount, the interest rate , the repayment schedule, and any other conditions that must be met.

Your bank may also require a formal valuation of the property before approving your loan. Depending on the size and complexity of your project, it could take up to four weeks for the loan to be finalised.

Once the you have signed the offer, the bond still needs to be registered which will require attorneys. The attorneys are often appointed by the bank and there will be legal fees in registering the bond.

This process can also take a month or two to complete.

How long does it take for a home loan to be approved by the bank?

Provided that the bank is satisfied with your financial situation and the offer is straightforward, it typically takes a week or two for the bank to approve a home loan.

The bond will still needs to be registered which can take up to 3 months. Once the bind ha sbeen registered, funds are released and transfer can go ahead.

What is the best bank to apply for a building or home loan?

Most South African banks offer home and building loans and they all work within the legal framework of the Home Loan and Mortgage Disclosure Act 63 of 2000.

Having said that, the banks do differentiate themselves by offering incentives if you get your home loan through them. Some of these incentives include cash back, more favourable interest rates or they may offer you a longer payment term which will lower your monthly bond repayments.

So, which bank should you apply to? ALL of them.

And when the offers come back , you should compare and contrast the different offerings to make sure that you are getting the best deal possible.

It is important to keep in mind that banks have different criteria when it comes to home loan approvals, so even if one bank does not approve your application, another may.

Also, make sure to look at fees such as the application fee, establishment fee and closing costs when comparing different home loan offers. These fees can add up significantly over the life of your loan, so it is important to make sure that you are getting a competitive rate to offset these costs.

Finally, take a look at the customer service offered by each bank. A bank may offer great rates, but if their customer service is poor it could make it difficult to manage your loan over the years. Take time to read reviews and talk to people who have had experience with each bank’s home loan offerings. This will help you understand how responsive and helpful the bank is when dealing with any issues that may arise in the future.

How can I apply for a building loan or home loan?

You can absolutely approach each bank directly and fill out every individual application form. However, it can be a time consuming process and you may find yourself comparing apples with oranges.

One of the best things we did when applying for our building loan was to go through a bond originator.

A bond originator will be able to access multiple banks and their products, allowing you to compare product features such as interest rates, fees and repayment plans.

There are no fees involved and you do not need to pay the bond orginator anything. They will work on commission from the banks and can save you a lot of time.

They are experienced in getting the best rates and they know what paperwork is required to speed up the application process. Bond originators also understand the different terms used by banks when talking about loans, allowing them to pick out any hidden costs or extra fees that you may not have been aware of.

If you’re looking for a bond originator, we highly recommend Patrick and Thea from BondExcel. They were able to help us get the best deal for our bond and provided great customer service throughout the entire process. They were knowledgeable, friendly and always willing to answer our questions without any hassle. We would definitely recommend them to anyone looking for a bond originator!

Summing it Up

As you can see, the process of applying for a home loan differs to applying for a building loan. The deciding factor in both cases comes down to whether you want to buy an existing house or if you want to build your dream home from scratch.

No matter which option you choose, we highly recommend Patrick and Thea from BondExcel. They were able to help us get the best deal for our bond and provided great customer service throughout the entire process.

If you have any other questions about home loans and building loans that we haven’t answered yet, leave us a comment and we’ll be happy to help.