As stability returns to the South African economy, banks have lowered their home loan requirements and offer more finance to home buyers. Now even 100% finance can be obtained. Despite these improvements, many South Africans are unable to take out a home loan either individually or together with their partner.
Many South Africans are not sure whether their income will be sufficient for taking out a home loan. They worry about the stability of their employment as well. In general, in order for an applicant to get approved for financing, he/she must meet the affordability requirement set by the lender. Affordability is defined as the ability of a borrower to repay their home loan given the interest rate, the size of the monthly instalment and the term of the loan.
Each home buyer is different so an individual strategy for obtaining a home loan has to be used. What all loan applicants should know is how banks evaluate their applications and what they look for. Here is the information which you will need for preparing your application so as to ensure that it will get approved.
Affordability is the main criterion which lenders use to evaluate home loan applications.
The affordability depends on three major factors.
1. Home Loan – interest rate, term and fees
The first one is the loan itself and more specifically its features such as interest rate, term and fees.
2. Applicant's Income
The second one is the income of the borrower. The higher it is the more affordable the loan will be.
3. Applicant's Monthly Expenses
The third factor is the monthly expenditure of the borrower. The expenditure includes living expenses and debt payments as well.
According to bankers, many South Africans face low affordability due to their high living costs and high debt levels. When your monthly spending is high, you will have a much smaller chunk of income available for repaying a home loan. The other major factor for the fairly low home loan application approval rate is the low creditworthiness of many applicants.
Home buyers who have a high income and low monthly expenditure can expect to qualify for the best home loans available in the South African market. For instance, they can obtain 100% finance to buy a property. In order for a bank to assess the affordability of a home loan for an applicant, it uses financial information about the person available from the credit bureaus. The lender looks into the applicant's income, living expenses and existing debt.
The lender looks into the gross income earned by the loan applicant and the income left after all expenses have been paid. The higher the remaining income is the more affordable the loan will be. Hence, the applicant will have higher chances of getting approved.
Affordability depends on the features of the loan as well. When the interest rate is lower, finance will be more affordable for each applicant. The interest rate on every loan depends on the repo rate determined by the South Africa Reserve Bank. Lenders reserve their right to charge higher interest when the borrower is considered to have a higher credit risk.
In general, all banks in South Africa adhere to the affordability rules and regulations of the National Credit Act. They are not allowed to extend credit to a customer, if its repayment is beyond the person's means. Reckless lending is dangerous for both borrowers and lenders.
It is the responsibility of home loan applicants to provide detailed, accurate and up-to-date information about their income, expenses and other financial transactions to the lender. This will enable the lender to run a full and accurate assessment of affordability. By evaluating the financial situation of the applicant, the lender is able to determine the monthly payment which the applicant can afford to make and consequently the loan amount. In general, the loan amount will depend on the deposit which the home buyer makes. The larger this deposit is the smaller the loan amount is.
When the lender obtains information about your income and expenditure from the documents which you provide along with your application and from the credit bureau, they use a ready formula for calculating affordability. They calculate your monthly disposable income. This is the income left after you have paid all debt and bills. If this income is higher than the monthly home loan instalment, you will meet the affordability requirement and most certainly get approved.
Typically, a home buyer is expected to contribute to the purchase of the property by paying a certain chunk of the sales price out of their pocket. This sum is called deposit. It determines the loan-to-value ratio, which expresses the loan amount as a percentage of the property's sale price. The larger the deposit is the lower this ratio is and vice versa.
In general, when you have more money to put down on a house, you will have less to borrow. This will give you higher chances of home loan approval and help you save on interest payments. Banks can even offer lower interest rate to applicants who are able to place a larger deposit. That is why it makes sense for you to save for a deposit to use towards the purchase of a house.
At present, most South African banks offer home loans with 100% loan-to-value ratio. This means that they finance 100% of the purchase. However, it is extremely difficult for the majority of people to quality for 100% financing. Most home loan applicants will be required to place a deposit of at least 10%. Those will less than perfect credit may have to put down 20%. Individuals with seriously damaged credit rating may have to place a deposit of 30% of the value of the property.
The size of the deposit which the bank will require varies based on several factors. It is worth looking at all of them. The first one is the type of loan which you take out. The deposit requirements for ordinary loans, buy-to-let deals and building loans vary considerably.
There are individual criteria which banks apply when determining the required deposit. Most lenders require smaller deposits from their existing customers. The employment status of the applicant has a direct impact on the deposit requirement as well. Individuals who are self-employed are considered to have less stable income and this naturally makes them higher-risk borrowers. As a result, they are required to place a larger deposit.
The individual risk of lending to the respective home loan applicant also determines the size of the deposit. Applicants who have lower credit score will have to place a larger deposit. This may also apply to those who have had a permanent job for less than three years.
The value of the property which the buyer plans to purchase will have a direct impact on the deposit. When it is higher, the lender will require a larger deposit to be placed.
The home loan approval rate varies slightly from one South African lender to another. Absa approves about 40% of all applicants while Standard Bank approves about 45% on average. Other banks like Nedbank and FNB cannot provide a precise percentage but it is typically close to 50%. This is what the average across all banks is.
Overall, home finance is readily available to South Africans. In order for you to qualify for it, you have to ensure affordability. The best way to do this is to lower your debt through faster repayment. You can also try increasing your income, but this often takes more time to achieve. It is best if you save enough money for a deposit of at least 10%.
It pays off to devote time and effort to preparing for getting a home loan and purchasing a house. When you are better prepared, you will not only have higher chances of approval. You will be able to secure better terms and conditions and even lower interest rate.