12 Feb 2013
While banks say they grant up to 100 percent home loans, many people are still seemingly battling to get finance whether they buy on their own or jointly.
Just recently, a desperate reader sent through an email to Property24.com and it reads: “My husband and I are looking for a house and the problem is that he is earning less than R5 000 a month with a permanent job. I on the other hand earn R15 000 a month after deductions but have been employed temporarily for almost two years now. Is there a hope for us or will it remain just a dream?”
This is just an example of the many email queries we get regarding home loans and buying property.
Since I am not a banker, I am not in a position to respond to the reader on whether they will eventually buy a home or not.
However, I spoke to the big four banks' home loans bankers to find out what the lending situation is and how they look at applications for home loans.
Readers may recall an article on How banks assess loan applications which gave an overview of what would-be loan applicants should bear in mind.
Of course, I was highly criticised as many readers expected a step-by-step guide on how banks actually assess different applications.
The consensus among home loans bankers is that every application is different, and as such, there is no way to say this is how we will assess application X or Z.
The most important thing to know when applying for a home loan is that it is not the amount of money you earn, but how much you can afford – affordability being the operative word.
According to the Absa Housing Review Q1 2013, buyers continue to battle with affordability due to high living costs and debt levels.
Affordability remains the single key constraint for many in the South African housing market and as Nedbank points out, in the affordable housing space, the big issue is credit worthiness and buyer affordability.
Read the article here.
In 2011, Absa did say they were granting up to 100 percent loan-to-value (LTV) to would-be home buyers only if they qualify, meaning they met the affordability criteria.
Click here to read the article.
What is affordability?
According to Steven Barker, head of home loans at Standard Bank, the bank looks at the applicant’s income and expenses as well as funds left after all expenses have been paid to work out if the applicant can afford to repay the loan or not.
“Consumers need to financially prepare themselves before applying for a loan.”
Timothy Akinnusi, head of sales and customer management at Nedbank Home Loans, says affordability refers to the customer’s ability in honouring their obligation to repay the home loan amount granted by the bank, through monthly instalments including the rate of interest over a set period based on the agreement they have signed with the bank.
The rate of interest is informed by the guidelines from the repo rate which is determined by the South African Reserve Bank, he says.
Nedbank adheres to the National Credit Act (NCA) ensuring it does not grant any of its customers, credit beyond their means.
Akinnusi say this means taking into consideration their existing income and expenses.
“Customers therefore need to ensure they provide the bank with accurate information when they complete their application, in order to enable the bank to assess their application adequately,” he says.
For Absa Home Loans, this means the bank undertakes an assessment to determine whether the applicant has the financial means to afford the monthly repayment on the home loan for which they have applied and the level of lending to which the bank has agreed after any deposit requirements.
Arrie Rautenbach, Absa head for retail markets, explains that in order to determine this, the bank needs to be able to prove the applicant’s monthly income and, through disclosure by the applicant and information obtained from the Credit Bureau, ascertain the existing monthly household expenditure and monthly debt obligations of the applicant.
He says using this information, it is a fairly simple calculation to obtain the applicant’s monthly nett disposable income (total nett income after statutory deductions) less household expenditure and debt obligations.
“If this level of nett disposable income is sufficient to afford the monthly home loan repayment, then affordability of the loan is considered to have been demonstrated.”
Ewald Kellerman, head of sales, FNB Home Loans, says before they approve a mortgage loan, they consider three main things namely affordability, the customer’s credit record and the actual property as security for the loan.
On affordability, he says the bank will do an assessment to determine if an applicant is able to repay the loan based on income and other financial commitments.
The NCA further requires that the bank consider the applicant income, other debt commitments and living expenses – subtracting expenses from income shows the net amount available to service a bond.
“It is vitally important that there is enough money left to repay the monthly repayment as a deciding factor in approving or declining an application,” explains Kellerman.
Home loan deposit
Kellerman says most banks offer 100 percent loan-to-value bonds currently, which means that there is no deposit required.
However, these bonds are not as common and new applicants are typically required to put down a deposit of between 10 to 20 percent deposit when buying a house.
“This deposit reduces the bank’s exposure and results in a deal with less risk to the bank.
“Typically banks are able to offer more competitive interest rates when customers increase the size of their deposits,” he says.
According to Standard Bank, would-be buyers can still get 100 percent and those applicants who require a deposit need between 10 to 20 percent with 10 percent being the most common, says Barker.
Nedbank grants up to 100 percent loans on their bonds and in the instances where a deposit is required it is usually in the region of 5 to 20 percent of LTV, says Akinnusi.
Rautenbach points out that the deposit requirements will vary from one applicant to another given that the bank applies different business rules based on:
1. The type of loan required, for example, ordinary loan, building loan, buy-to-let, vacant land;
2. The applicant type whether it is an existing Absa customer, non-Absa customer, full-time employed customer or self-employed customers
3. The size of the loan which is being applied for
4. The risk grade of the applicant at the time of application
5. The actual valuation of the property, as assessed by the bank.
“All these factors are considered to determine varying maximum loan to valuations, which will in turn determine the deposit that is required from the applicant,” explains Rautenbach.
Home loans approval percentage
Asked on what percentage of home loans Absa grants to applicants, Rautenbach says this differs over time, depending on the customer risk profile applying each month.
This typically ranges between 30 and 50 percent while Nedbank grants up to 100 percent.
FNB could not quote the percentages at this stage while Standard Bank grants between 40 to 50 percent loans.
From talking to these bankers, it would seem banks are open for business, however, many applicants may find securing finance difficult which is why it is important to get financially fit before, meaning paying off debt and on time to meet the affordability requirements.
Saving for a deposit is also essential as this may enable one to qualify for a loan should they not get a 100 percent loan, and the 10 easy steps to save money could be a starting point.
In the next article in this series, we will look at additional costs when buying a home and home loan interest rates. – Denise Mhlanga
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