So, you think you have a home loan?
A home loan is not a is not a home loan
Not that long ago, someone on Twitter was claiming that there’s a difference between a home loan and a mortgage. As I am well connected in the property industry, I called up my contacts to ask.
The issue here seems to be that (in South Africa) the terms are used interchangeably by all parties involved. I thus initially thought this is the same thing. I was, however, rudely awakened by the final answer I received!
For this post, I will call the one ‘traditional mortgage’ and the other one ‘home loan’. For the most part, the semantic distinction is not found in the industry – likewise neither do most consumers know there’s a difference!
A traditional mortgage
Traditionally a mortgage is provided by one of the big four banks. They have special divisions that specialise in mortgages for homes. Here are some of the ways this is set up:
- When you take out a mortgage on a property, there will be an initial bond initiation fee. This will be added to your loan account at the bank. The amount is normally between R 4 000 and R 5 500.
- Your interest will be accrued daily. This means that if you borrowed R 1 000 000 for your property and have an interest rate of 10%, on the first day, the amount of R 273.97 will be added daily as interest. You will pay off the amount in monthly instalments
- If you want to pay off your mortgage early, you can transfer more money into your mortgage account. If you do this, you will only pay interest on the outstanding balance.
- These accounts are often flexible – you can add and withdraw your extra money as you see fit, saving you money paid on interest.
The other 'home loan' ...thing
But hold on – why can only the big four banks get all the money?! Surely we can spread this thinner and create more competition. This is where other loan companies decided to step in. Many companies that traditionally only did car loans created a product that they brand as ‘home loans’. Here are some of the ways this is set up:
- When you get a home loan from one of these companies, there will be an initial initiation fee. This will be added to your loan account.
- The full 20 years of interest will also be added in advance onto your account on day one. This means that you will be paying off the full amount in monthly instalments from day one
- If you want to pay your loan off earlier, you will need to contact the company, deposit the money in the loan account and let them recalculate the monthly amount based on the lump sum that you paid in.
- You cannot withdraw the lump sum that you ‘saved’ from this account.
How will I know which one I have?
The short answer is to ask. Ask your loan provider to give you more information about how your loan and repayments are structured. If you have your loan through one of the big four banks, it should be a mortgage type loan.
If your loan is through companies like Sentinel or BMW Financial Services, then you probably have the latter home loan ‘thing’.
Given these points, it becomes clear why I favour the traditional home loan. It allows more flexibility for paying back the money and doesn’t psychologically make you feel like you’re owing the bank three times your lending amount. It will also make it possible to pay it off faster, pay less interest and put your emergency fund in the account until needed – but that’s just me.
The semantics get in the way of properly explaining the difference in the structure of what I call in this post a “mortgage” and a “home loan”.
You might remember that I wrote an article on bond costs – these costs I have done for the traditional mortgage. You can find the article here.
In conclusion, it’s important to ask about your terms and conditions of your home loan.
If you’re not sure, ask how your repayments will work – what would happen if you wanted to pay your home loan thing/mortgage off earlier?
So now – Go! Go! Go!