How banks assess loan applications

08 Sep 2011

Affordability has been singled out as having become a key factor in the South African housing market according to Absa Home Loans. 

Affordability is a key factor in the South African housing market and banks' lending criteria has tightened up, but in some instances applictants are reportedly still able to qualify for 100 percent loans.

In its quarterly review recently, the bank said the focus of demand for supply of housing is set to be on smaller-sized and higher density housing because affordability is set to remain a key factor into the future.

Absa also said it still lends up to 100 percent home loans to would-be home buyers even in this market but only if they qualify. However, many Property24 readers have disputed this statement and questioned Absa and other banks’ lending criteria. In response to an article published recently on Property24, readers have said their applications were turned down as they were not Absa clients and therefore regarded as high risk applicants.

One reader said the bank approved only 60 percent because they were not an Absa customer while another would-be buyer’s application to switch to Absa was declined despite a good credit history only to be approved by another bank.

Following this article, readers wanted to find out what the banks’ lending criteria is when assessing home loan applications. We have asked all four major banks (Absa, FNB, Nedbank and Standard Bank) to give us a low down on how they assess each home loan application.

Absa Retail Bank chief executive officer, Gavin Opperman says the bank is committed to fulfilling its role in response to the government’s call of housing the nation.

“We believe that the aspiration to house the nation is an important part of strengthening the social fabric of the country and will give people self-esteem and dignity.”

He explains that in line with the National Credit Act, the bank’s lending criterion is informed by the customer’s affordability and credit worthiness and taking into consideration some factors as discussed in the table below.

Some macro factors that influence the bank’s lending criteria include the prevailing economic cycle and prospects for economic growth, inflation and interest rates. Household finances (income, consumption, saving, credit growth, debt and debt servicing), residential property cycle and prospects and consumer risk profile (debt ratios, debt repayment and credit records) are considerations says Opperman.

  Absa Home Loans FNB Home Loans Nedbank Home Loans Standard Bank Home Loans
What criteria do you use for assessing a home loan application?

- current debt repayment behaviour
- credit history
- affordability
- net disposable income
- household finances
- residential property cycle and prospects
- prevailing economic cycle
- consumer risk profile

 

- latest copy of applicant’s payslip
- bank statements in some cases
- self employed applicants will need to supply a signed personal statement of assets and liabilities as well as a balance sheet and financial statement for the business from which income is derived
- a commission earner will be required to submit the last six months commission earnings statement 
 

- minimum income (single or joint gross monthly income) + R2500- minimum loan amount R100 000
- maximum repayment term 25 years
- acceptable credit record
- payment by debit order
- the property must be in good condition and acceptable to the bank

- a loan–to-value criterion plays a major role in what the customer can qualify for.- documents required depend on whether the applicant is employed or self employed, has a Standard Bank transactional relationship or not and if they earn a fixed or variable income.
- generally, document requirements are less onerous for customers that have a transaction account i.e. Employed SBSA applicant with fixed income would need to provide the latest payslip and an offer to purchase.
- non Standard Bank customer with fixed income customer would need to provide the latest payslip together with the latest three months consecutive bank statement reflecting three months’ salary deposits.

What percentage of the property value can be borrowed and what percentage deposit does the bank require in order for a home loan to be approved?
 

The current prevailing home loan base rate is 9 percent.

This will be determined by the risk profile of the applicant but should one qualify, the bank can give up to 100 percent loan-to-value transactions.  

Nedbank clients applying for new loans:
-
less than R1. 5 million - 95 to 100 percent
-
more than R1.5 million - 90 percent
-
over R3 million 80 percent

Non- Nedbank clients applying for new loans:
- Less than R3  million - 90  percent
-
Over R3 million - 80 percent
-
Nedbank requires a 10 percent for a home loan valued over R1.5 million and the bank assesses these loans according to the customer’s risk profile.

The risk profile of the customer and the loan amount determines the required deposit.  

What types of home loans are available and which of these offers the best variable/fixed interest rate?

Customers can choose either a variable or fixed interest rate option. A variable interest rate is a fluctuating rate based on the prime lending rate, as set by Absa from time to time. If the prime interest rate changes, the client monthly repayments will change. A fixed interest rate is an option whereby the client is guaranteed a fixed interest rate for a predetermined period of time, of up to two years. After this period has expired, the interest rate simply reverts back to the prime linked rate applicable at that time.

There are various products and it is up to the applicant to choose which best suits their needs. Normally, a variable interest rate applies but the applicant has an option to apply for a fixed rate subject to certain conditions.

Ordinary home loans:- the residential home loan is a flexible product that can be tailored to suit the customer’s individual needs. - it can also be used for the purchase of an established residential property or the construction of a residential property in a proclaimed township.

Building loans:
-This loan used to finance the construction of a dwelling, additions or improvements to an existing dwelling.
- Progress payments are made against completed work subject to pre-determined number of draws.
- Nedbank carefully monitors the building project in order to ensure that your home is completed within a reasonable time.
- The product type does not have a bearing on the rate offered, be it fixed or variable.  

Traditional Home Loan, First -time Home Buyer which includes costs up to a maximum of 104 percent and Building Loans.  

The Traditional Home Loan, whether variable or fixed, provides the best rate to the customer.  The fixed rate offers the customer peace of mind for up to three years.

Will the bank give
pre-approval of the home loan with no upfront fees?

 
According to the National Credit Act, financial services providers are prohibited from granting pre-approved finance to customers.
 
Yes, it is called a “Passport to Purchase” where no upfront fees are levied and this pre-qualification is valid for 90 days.
 
Nedbank does not grant pre-approvals. Customers can read through the information on the bank’s website to determine what they can afford through various calculations. A customer can apply for a pledge via the internet or through the Standard Bank Call Centre. No fees are charged for pre-approvals.  
Upon approval of the loan, will I have to take out the bank's mortgage insurance?

 While we insist on customers insuring their mortgage, we do not compel customers to take up mortgage insurance with Absa.

Mortgage insurance is vital for the protection of the most valued asset – the home.

Insurance cover is required to protect both the bank and customer. This may not necessarily be that of the bank but must be a reputable company that meets the requirements of FNB.

Customers have the choice to either make use of Nedbank Home Owners cover or opt for cover supplied by other service providers.

Insurance is required as part of the agreement and customers have the freedom to choose which insurance provider to use.
What is the interest rate charged on home loans currently?
 
The current prevailing home loan base rate is 9 percent  The interest rate is related to the risk associated to the lending in line with the bank’s lending principles and underwriting practices. The interest rate applicable to a home loan varies from customer to customer and is determined by individual risk profiles. The rate is entirely dependent of the customer risk profile.
What extras come with the home loan?

Absa MyHome
-
A product which is focused on providing affordable housing. It has the following extras. 

- free voluntary HIV/Aids Treatment Program: Customers who access 100 percent LTV (Loan to Value) automatically qualify for the Voluntary HIV/Aids offer, at no costs to customers. 

- this proposition includes free voluntary medical examination and free anti-retroviral treatment (ARV). As part of the package, we also maintain the customer’s home loan instalment if he/she is unable to work because of illness until he/she recovers, at no cost to the customer. 

-repayment term of the loan whereby customers can opt to extend the term of the home loan up to 360 months as opposed to the normal lending term of 240 months. It is, however, important to note that the interest charged over a longer term is higher compared to a shorter one.

- this benefit is also applicable to the traditional Absa Home loans customers.

Home Owners Comprehensive Insurance (HOC) - Absa has designed an HOC product for all our home loan customers.

- the product covers the physical structure of the home in case of damage caused by storms, floods, fire or other disasters. --when our customers take up the HOC product with Absa, they save on their monthly home loan service fees. HOC is a compulsory requirement and customers have the freedom to select the insurer, as long as the policy meets Absa’s minimum requirements.

- this benefit is also applicable to the traditional Absa Home Loans customers.  

FlexiReserve – Advance Option: Customers can have access to all pre-paid amounts paid into the home loan account.

-these are amounts paid over and above the normal monthly instalments.

-this benefit is also applicable to the traditional Absa Home Loans customers. 

Home Loan Protection Plan (HLPP): The HLPP product is a life policy that isdesigned specifically for Absa Home Loans customer and it includes death and permanent disability.

- unlike the normal credit life product, the product does not prescribe a medical examination.

- under this service offering, customers enjoy a wide range of cover options which include death, disability, critical illness cover and income protection.

- this essentially allows beneficiaries to meet all their insurance needs in relation to protecting their loved ones and themselves in a single, comprehensive, policy. 

Borrower Education (BE): BE is applicable to all first-time home-owners and is a compulsory requirement of the loan.

-the programme is specifically designed to educate our customers about all aspects of home-ownership.

Borrower Education is provided by external vendors after the final grant stage of the home loan process.

Absa Home Loans arranges this for the customers.

There are no extras. 
 

NedRevolve facility 

- is an option that provides customers with speedy access to surplus funds, which accumulates should the customer pay more than the prescribed instalment or decides to make a lump sum payment to the home loan account.

- any excess fund available in the home loan account may be credited to a nominated Nedbank account or an account linked to the customer’s electronic profile.

HomeVision

- a loan that allows the customer to register a bond, higher than the required loan amount thus creating a surplus amount that can be accessed later.

- this facility becomes available to a customer when the value of the property has increased, the customer’s income has increased and when the customer has to apply for the surplus funds, with each application being subject to the bank’s credit approval policy.

First-time home buyers can qualify for costs up to a maximum of 104 percent Loan-to-Value, 20 to 30 year term, fixed rate and access bond.

These are all subject to the customer qualifying and prevailing credit criteria at the time of application.

Are there any exit fees?

The exit fee exists in the form of a penalty interest that is applicable when the customer has not provided the bank with a 90 days notice before cancellation.

In most agreements within the home loan mortgage industry, there are clauses to this effect whereby notice has to be given within a certain time frame. After registration of the bond, customers are required to give 90 days’ notice of their intention to cancel the bond and settle the account.
 
Three months cancellation fee is charged.
 
Do you give home loans to applicants who are not your clients? Each customer has unique banking needs and we encourage customers to contact Absa directly in order to assist them in finding the most suitable financial solution. Consideration is given to all applicants and there are divisions that cater for specific needs.
 
Banking with Nedbank is not a prerequisite to obtain a home loan Standard Bank does give home loans to non-customers.
How do customers contact the bank? Log onto the  websitewebsite or call our Home Loans Call Centre on 0860 111 007 or a Home Loans Express Agent for a visit on 0860 999 123 - it's a free service. For more information on different FNB Home Loans offering, visit the website. For more information on Nedbank Home Loans, visit the website.  For more information on Standard Bank Home Loans, visit the website.


Property24 did a quick check on the basic documents required and essentially, for all four banks an applicant will be required to submit proof of income (three months bank statement), certified copy of identity document and proof of current residential address.

Banks have made it easy for applicants to apply for a home loan online. – Denise Mhlanga

Readers' Comments Have a comment about this article?   Email us now.

I do not know if ABSA has changed its lending policy for Windsor West due to the underlying clay and 50 year flood line, but those were the criteria when I was Mortgage Loans Manager for the United Building Society in the late 1970s, spending R11-million a month on housing. - Ian

We are not ABSA clients, but they gave us the BEST service of all the banks (thank you ABSA N1 City, Cape Town) and they gave us a 100% loan. Standard Bank only offered 80%, because we were not banking with them and SA Homeloans (also great service) offered 95%. Our own bank only offered 90% - Annelize

I am an Absa client of more than 10 ten years,last year I applied for a loan and was completely declined,I appealed they decision and they became more stubborn , tried again this year and was offered 75% bond. 
I tried  standard bank and they offered me 100% bond,no deposit, 590K with 9.35 % interest rate,they took only four days to approve that. I am moving in to my brandnew town house in about a month. Absa is useless, after my bond registration they will kiss my business goodbye, I am taking my account to Standard Bank, I hate Absa. - Clive

I don’t know who told you that ABSA still offers 100% homeloans but when my fiancé and I were there last week in the Bedford Centre branch we were told an unequivocal NO. No conditions, just “No we don’t offer 100% bonds at all”. My fiancé banks with them currently. Other banks like Standard Bank, Nedbank, and FNB do offer 100% bonds to around the R1,500,000 mark and are much more approachable and keen for business than ABSA. This has been my experience. - Justin 

When we applied for a Home Loan in Jan/Feb 2011, we were informed by ABSA that due to the fact that we were not their clients and before looking at our application and risk profile, they were only allowed to offer us a 70% bond.  FNB had no problem providing us with a 100% bond at prime less 0.5%.  I just wish FNB could offer 30 year home loans. - Sevi 

I don’t believe this article actually answers the question that it sets out to. It gives lots of information that is easy to come by (and incorrectly states that there are no “extras” available with FNB) on the banking websites, but doesn’t really go into depth about the workings of how the applications are actually assessed, pointing out red flags to look out for in your own profile and good things to work towards in your own profile. I don’t feel the article has equipped me to better convince the banks of my creditworthiness, which I think was the point in the first place. - Jonathan 

I am currently in the process of purchasing a house. I have been with ABSA bank since the United bank days but the treatment I got was pathetic as I was told that I would only get 85%! I am a first time buyer as well as Platinum account member which is supposedly the VIP account to be with but I think ABSA is all talk and no action! I would gladly cancell all accounts with absa and move to bank will to serve their customers! - Shalen

I’ve been banking with ABSA since I was studying but when I applied for home loan Last year they didn’t give me 100% bond I was so angry because my credit record is good then I went to standard bank they gave me the 100% bond. I don’t believe what there are saying is true about still giving people 100% bond if there are qualifying. - Sane 

I am a FNB Premier Client and banking with FNB for 35 years. According to their criteria I did not qualify for a further bond (I applied for a 100% on R1m)  and the reason/s FNB provided did not make sense at all.After appealing the decision through my Premier banker, nobody from “Credit Management “ even attempted to speak to me or clarify my appeal or even approve the loan conditionally maybe suggesting a 10, 20 or 30% deposit (incidentally I did have a 40% deposit available if need be).All communication was done through the poor Premier banker (who I must compliment for her efforts) who was at the peril of “Credit Management” SA Home Loans approved a 95% loan within days and the registration process is well on its way.Every good boy deserves favour but in this case FNB does not practice what it preach but rather “How we won’t help you!” - Johann  

I am a client of ABSA from the time UBS was taken over. I purchased my flat in North Beach Durban, which is now free hold. I am married to a person that has TWO monthly income for 10 years and I receive TWO incomes for the past 5 years which is paid into my ABSA account. I am platinum card holder with a priority pass at airport lounges. Credit card has a credit balance. My bond account was in credit and a million rand flat which was freehold. I bought a house in a good area from ABSA repo section. My loan was declined. Another bank granted me a loan in 24hours. It seems like ABSA will be kissing another old client goodbye. Maybe they had another client for the house who now wanted to pay more for it. Makes you think,doesn’t it. - Imtiaz 

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