Howzit, mates! If you’re here, chances are you’re considering diving into the exciting world of homeownership. One word that might be tickling your ear lately is ‘mortgage’. Some view it as a necessary evil, while others see it as a friendly tool on the journey to owning that dream home. For those who see the word and think, “What on earth is a mortgage, and how does it work?” – this one’s for you. Let’s break it down, step by step, with all the simplicity and clarity your heart desires.
Firstly, what is a mortgage? If we dive into the Latin roots of the word, it literally means ‘death pledge’. Quite a dreary start, isn’t it? But fear not, this simply means that the pledge ends (or ‘dies’) when either the obligation is fulfilled or the property is taken through foreclosure. In simple language, a mortgage is a loan from a bank or building society that helps you buy property.
You see, our mate Mr. Bank will lend you the money to buy your dream house, but with one condition – until you’ve repaid the full loan amount with interest, the bank has the right to take the property back if you fail to make your repayments. It’s a bit like the bank saying, “Alright, we’ll help you buy the house, but if you don’t pay us back, we’re taking it.”
So, how does a mortgage work? Let’s say you’ve found your dream home in Johannesburg or Cape Town, and it costs R2,000,000. Unless you’ve got a spare couple of million Rand lying around, you’ll need a mortgage. Typically, you’ll put down a deposit, say 10% (R200,000), and borrow the rest (R1,800,000) from the bank. This loan is the mortgage.
Now, like any good friend who lends you money, the bank isn’t doing this out of the kindness of their hearts. They’re going to charge you interest, a sort of rental fee on the borrowed money. The interest is spread out over the repayment term, which could be anything from 15 to 30 years, depending on the agreement.
Every month, you’ll make a payment towards the loan. These repayments are part principle (the original loan amount) and part interest (the rental fee from the bank). At first, most of your monthly payment will be gobbled up by the interest. But as time goes on, the scales will tip more in favour of the principle. This is what we call an amortising loan.
Remember, the larger your deposit, the smaller your loan, and the less you’ll have to pay back in interest. Moreover, the quicker you pay off your loan, the less interest you’ll pay. Therefore, if possible, it’s often a good idea to put down a larger deposit and aim to repay your mortgage as soon as you can.
It’s important to note that the type of mortgage and the interest rate can vary. There are fixed-rate mortgages, where the interest rate remains constant over the term of the loan, and variable-rate mortgages, where the interest rate can fluctuate. Your choice will depend on your personal circumstances and how much risk you’re willing to take on.
So there we have it! A mortgage in a nutshell. It’s like a trusty sidekick on your journey to homeownership, but remember, like any sidekick, it needs careful handling. Defaulting on your mortgage is a serious matter, as it can lead to the loss of your home. So, always ensure you’re making informed decisions and consulting with trusted financial advisors.
In the immortal words of Madiba, “Money won’t create success, the freedom to make it will.” With this knowledge under your belt, you’re one step closer to that freedom, and that dream home. Keep learning, stay savvy, and happy house hunting!
Cheers for now!
