Applying for the Mortgage: Information Banks Want to Know

Completing a mortgage application can be an intimidating task, especially if the borrower is uncertain of what information will be needed. Here are some key factors that lenders consider during the application process:

• Credit Report. As a borrower, it is important to obtain credit reports from each of the three major credit bureaus, and examine them carefully. Incorrect information can cause higher rates, or keep the borrower from getting a mortgage altogether. It's estimated that over forty percent of all credit reports contain errors. Any discrepancies need to be corrected as quickly as possible.
• Credit Standing. Carry low credit card balances, or pay them off, along with any other outstanding bills before applying for the mortgage.
• Credit Accounts. The amount of a borrower's credit accounts can make a difference when applying for a mortgage. Avoid closing current accounts or applying for new ones, as this can make the lender suspicious.
• Down Payments. The more money a borrower can afford to pay up front, the more likely they are to be approved. It also makes for a lower loan. Of course, borrowers with an excellent credit history are likely to be approved regardless of how much money they can afford to put down. For those with less than perfect credit, the amount of a down payment could make the difference between approval and rejection.
• Income. Lenders look for steady sources of income, so avoid changing jobs or quitting right before submitting a mortgage application.
• Interest Rates. Loans are not approved or denied based on interest rates, but they do help to determine monthly payments. Interest rates can also change while the loan application is being reviewed and processed by the lender. Therefore, if the borrower thinks the interest rates could rise, they may consider paying a "lock-in" fee in order to guarantee a favorable rate.
• Available Funds. Along with a good down payment, borrowers should have funds set aside to cover closing costs, and (if necessary) pay for points. Avoid major purchases that may deplete any available funds prior to purchasing a new home.
• Price Ranges. In order for a borrower to get an idea of how much they can afford monthly, it is important to figure out their debt-to-income ratio. Lenders are unlikely to approve the mortgage for a house the borrower cannot afford.
• The Lender. Diligence is an asset, and every lending institution is different. Learn the reputation and history of the lender, and find out how many mortgage applications they approve, as well as how many they deny. If the lender denies twenty percent of borrowers who apply, it's not a good sign.

FLEXIBLE FIXED DEPOSITS

Fixed deposits are designed for lump-sum savings, but a couple of banks offer more flexible arrangements that allow you to make multiple deposits over a fixed period.

* FNB’s Flexi Fixed Deposit requires a minimum deposit of R100. You can deposit more at any time, but withdrawals are limited to two of not more than 15 percent of your savings. There is a fixed term of three or 12 months, which you can then renew. Interest is tiered at 2.25 to 4.25 percent. Unlike a regular fixed deposit, where the interest rate would remain fixed for the investment term, the rates fluctuate in line with general interest rates.

* Capitec offers a fixed-term savings plan with multiple deposits for clients on their Global One facility. You can deposit money when you like but cannot withdraw anything before the term is up. Interest rates are fixed for the term (six, seven to 12, 13 to 18, or 19 to 24 months) and range from 6.1 to 6.6 percent for amounts in our investment range. Taking an average rate of 6.4 percent, and deducting the monthly R4.50 administration fee, the final savings figure would be R34 947. Bear in mind that, because the interest rate is fixed for the investment term, you would lose out if the rate had to rise.

Buy-to-let

If your child simply cannot afford to get on the property ladder – even with your help – then you could consider buying a second property yourself and allowing them to live there, rent-free or otherwise. This option is especially common among parents whose children are going to university.

There are obvious benefits for parents; as well as helping their child, they also have the potential to earn an income from the rent, and assuming they retain the property for a certain period of time, they could also make a capital gain.

But this option should not be entered into lightly. Buying a buy-to-let property should be seen as a long-term investment, and (unless you have the cash to buy one outright) might also mean taking on more debt in later life.

“This is a long-term commitment, and the ultimate motive for doing this should be to invest in property,” says Hollingworth. “If your child later wants to move out, you may need to rent it out to strangers, and take on all the advantages and disadvantages of being a landlord.”

Of course, you could sell-up when your child decides to move out, but this leaves you at risk of making a capital loss on the property.

There are also tax implications in buy-to-let; for a start, you face paying income tax on the rental income, and as the property isn’t your main residence, you also face paying capital gains tax when you come to sell. It will also be counted as part of your estate for inheritance tax purposes.

There are a number ways to mitigate your tax liability and it's worth speaking to an independent financial adviser for advice.

Finally, getting a buy-to-let mortgage isn’t as easy in the current climate as it has been in the past. Fewer lenders offer this type of loan, and rates can make it an expensive way to borrow. Plus, because you’ll be renting to a family member, your mortgage will be regulated (most buy-to-let loans aren’t currently regulated by the Financial Services Authority) which might mean less choice of competitive products.

Avoid investments when saving for a mortgage deposit

The key to saving for your deposit is to make the most of every penny you save. With savings rates still at record lows, you may be tempted to put some of your money onto the stock market to try and achieve a better rate of return.

However, when you invest your money, you put it at risk of falling in value. You'll have the potential to make better returns than the bank, but you could do much worse. It’s unwise to put your deposit savings at risk as it may take a number of years to recover from any falls in the stock market, setting back your plan to get on the property ladder.

100 percent Mortgage Risks

It is important that you fully understand the risks involved with 100 percent mortgages. These include:

• Even after you obtain your mortgage loan, you may be required to deposit more cash or securities if the value of the securities you pledged falls below the minimum required by your firm. A decline in the value of the securities you use as collateral for a 100 percent mortgage may require you to provide additional cash or securities to your firm to avoid the forced sale of those securities. Ask yourself: If I didn't have the cash in the first place for a down payment, where will I find the cash if my securities lose their value?
• Your firm can force the sale of pledged securities to meet a collateral call. If the value of pledged securities falls below the minimum amount set by your firm, the firm can sell the securities you pledged. The cash received from the sale of securities then remains in the account until:
• • The mortgage is repaid or refinanced;
  • You instruct the firm to use the funds to pay down the mortgage;
  • The equity in your home reaches a certain level, allowing the collateral account to be closed; or
  • The cash is applied to the outstanding mortgage balance upon default, if necessary.
• Your firm can sell your securities without contacting you. While most firms will attempt to notify their customers of collateral calls, they are not required to do so. Even if you're contacted and provided with a specific date to meet a collateral call, your firm may decide to sell some or all of your securities before that date without any further notice to you. For example, your firm may take this action because the market value of your securities has continued to decline.
• You are not entitled to choose which securities are sold. There is no provision that gives you the right to control liquidation decisions. Your firm may decide to sell any of the securities that are held as collateral for your mortgage.
• You are not entitled to an extension of time on a collateral call. While an extension of time to meet a collateral call may be available to you under certain conditions, you do not have a right to the extension.
• If you default on your mortgage (stop making your monthly payments), you could lose both your home and the securities you pledge. Some states allow your firm to immediately sell your securities if you default on your mortgage. Other states only allow your securities to be liquidated after your house is sold for a loss at a public sale.

BENEFITS OF TERM DEPOSIT ACCOUNT

• The idea of locking away your money at first might seem a little unattractive, but there are a number of good reasons for doing it.
• The very reason which makes a term deposit appear so unattractive is the very reason which makes it useful - your money is locked away, safe from any temptation.
• When you open a term deposit account, the interest rate is largely determined by the length of time you agree to leave you money in there. Generally, the longer the term the higher the interest rate.
• There are usually no account keeping fees. As you cannot put money in or take money out of the account, there are also no transaction fees.
• You can arrange to have your term deposit roll over to another term deposit automatically, avoiding any hassles of having to withdraw your money and then reinvest it.
• You choose the term you want.
• Because your rate will be fixed for whatever term you decide to fix it for, if interest rates in the market go down, your rate won't budge.
• On the downside, if you need your money for whatever reason before the term is finished you will be penalised for withdrawing it. 
• Be warned though, some term deposits offer a portion of the deposited amount at call but tend to offer lower interest rates than standard term deposits.