years ago, a young couple wanted to build a house; they paid
cash for a piece of land, only to find that the property was
mortgaged to a bank and the vendor did not have the right
to sell the property. This proves that there is some virtue
in borrowing money.
But perhaps the most important calculation in securing a mortgage
is a determination of how much you can borrow.
A simple calculation assuming an interest rate of eight per
cent per annum and salary of $10,000 per month, before tax,
would qualify one for approximately $450,000, for 25-year
If a 20-year loan is selected, the same borrower will get
just about $400,000. If the interest rate on the loan is ten
per cent per annum, the same salary will qualify the borrower
for approximately $480,000, for a 25-year period.
However, basic pre tax salary is seldom used by itself to
qualify the borrower. One must consider the demands on the
salary, in terms of living expenses and other loans being
paid from the same salary.
Once you gain approval for the mortgage, a typical lender
institution will give you a letter of commitment that contains
the details of the loan arrangement.
An application must be filled out by the borrower and there
is normally an application fee.
The lender institution will then conduct a legal search to
determine whether the title of the property is valid. There
will also be a valuation of the property.
Some properties do not have proper boundaries, and the ownership
is not clear. Other properties may be tied up with other liabilities.
In addition land rates and tax payments as well as water supply
clearance must be obtained.
A failure in any of these areas could delay the process by
several months, or it can lead to an inability to pursue the
While the majority of properties for sale on the local market
have good title and are not encumbered, there are sufficient
stories of people being swindled out of their deposit money,
by unscrupulous people, especially those on the verge of bankruptcy.
There have been cases where a non-owner tried to sell property,
or where an owner attempted to sell property tied up in the
So the buyer must beware. Even if you have all the cash, it
helps to purchase property using the mechanism of a loan,
through an established lending institution. These institutions
have a reputation for thorough searches, and it is unlikely
that you will be swindled by unscrupulous vendors.
When the searches are complete, the paper work detailing the
legal rights of lender and borrower are put into place. There
will be documentation to indicate the amortisation schedule.
There also will be an explanation of how the interest and
the principal amount borrowed will be repaid over the years.
Common documents are a Deed of Conveyance and a Deed of Mortgage.
Once these are accepted by the borrower, the money is disbursed
and the borrower is free to proceed and acquire his new property.
If the loan involves construction of a building, there will
be bridging finance. This means the money will be released
in tranches and inspectors will visit the site to ensure the
money is being used to erect a solid structure.
The story of the young couple and the dream home they built
does not end there, however, the plot is subject
to flood, earthquake and hurricane.