Prospective home buyers are traditionally so caught up in the excitement of becoming a home owner that they often neglect to conduct any research on lending criteria requirements when applying for a home loan.

Since the National Credit Act (NCA) forbids any credit provider from lending to customers if the loan is unaffordable, it is critical for consumers to establish whether they have the means and ability to afford the monthly home loan repayments. “This also entails taking their future prospect and obligations into account when considering purchasing property”, says FNB Home Loans CEO Jan Kleynhans.

The question of affordability considers all aspects of the consumer’s financial affairs which include the stability of income, current loans, expense obligations (including costs incurred to purchase a property such as transfer duty and other property transaction costs) as well as living expenses and lifestyle. “An important consideration, whilst immeasurable, is the prospects of the consumer to service the loan should they run into financial difficulty at a later stage. These considerations often result in the credit provider requiring a deposit against the loan to mitigate any losses that may arise should the consumer default at any time during the loan contract period,” says Kleynhans.

To determine whether the deposit will be sufficient, one has to consider legal fees, transfer duties and initiation fees associated with a property transaction. The bank’s deposit requirement would be over and above that required to pay for the property transaction costs. For example, the bank may require the buyer to put down a 10% deposit against the purchase price. In addition, you will need to finance the relevant property transaction costs. “The transfer duty charged for properties worth more than R500k is substantial and unlikely to be financed by the bank”, says Kleynhans.

“It is advisable to save for a deposit first to avoid borrowing against the full purchase price, as this will decrease the monthly instalment and the bank will consider the loan in a more favourable light. Thus, the greater the deposit the more likely you will pay a lower interest rate during the contract period of the loan.”

Once the buyer has saved for the required deposit, one can then calculate the monthly instalment of the home loan and its impact on the overall affordability assessment and household budget. This would include making allowance for everyday expenses such as insurance, transport costs, groceries, monthly instalments on current debt, as well as rates, taxes, amenities and levies on the property intended for purchase.

Once the prospective buyer has made an offer on a property and the offer-to-purchase has been signed, the proposed budget and deposit must accompany the loan application.

The credit provider will assess the accuracy of the proposed budget, the deposit, the value of the property in question and the buyer’s creditworthiness. As part of the assessment, the credit provider also looks at whether the consumer is likely to meet any reasonable and likely interest rate increases as well as other unforeseen expenses and events that may arise in the future.

“Important to note is that the customer must have an acceptable credit record which demonstrates a track record of servicing monthly instalments on current and past loan obligations,” says Kleynhans. To further decrease monthly commitments, one should pay off any existing debt before applying for a home loan, as this will improve the customer’s ability to service the home loan.

Once the loan application has been approved, the property will be valued to assess whether it will serve as sufficient security for the loan, says Kleynhans. An attorney will then draw up the bond documents for the consumer to sign, after which the property transfer will be lodged in the Deeds Office.

A bond application will be declined for two primary reasons: a negative credit record, in which the customer will have to take time to build up a better credit record, and if affordability is in question. “In both of these cases, the customer will either need to save for a larger deposit or consider buying a more affordable property,” says Kleynhans.

Carol Reynolds, area principal for Pam Golding Properties (PGP) in Durban North and La Lucia, says buyers have realised that deposits are becoming the norm rather than the exception, so most are willing to put down at least 10%. “While the banks have ‘loosened’ their criteria to allow 100% bonds, a move which the industry supports, the reality is that 100% bonds are still few and far between. Only a select few are considered for this possibility, and generally a property that is priced above R1,5m requires a deposit. A 20% deposit is still the safest option.”

Reynolds says a lot of buyers are still overconfident in their expectations. “There’s been a lot of press about the economic climate, rising costs, and strict lending, and today’s buyers are sophisticated, so they generally have an idea of their affordability. However, despite their sophistication, some buyers are still finding it difficult to accept the conservative lending climate. Sometimes buyers will try for a higher bond, and then make a plan to raise the shortfall after-the-fact.”

She says there is still a lot distress in the market. “We are still working closely with the banks to assist with distressed sales, and the primary reason for selling in the current market is to downscale. So even in ‘undistressed’ sales, as we slowly recover from a collapsed market, people across the board are tightening their belts.”

The prominence of the downscaling factor was accentuated in FNB’s Estate Agents survey for second quarter (Q2) 2010, which showed that downscaling was the leading sales factor.

Tony Ketcher, MD of Seeff Randburg, says there is no doubt that buyers are becoming significantly more realistic in terms of what they can afford but also are looking to the estate agent to provide that advice. “Our agent team in most cases will refer the potential buyer to our bond originator associates first in order to determine, based on their current income, what they can afford.

“The trends in terms of areas that buyers choose are also changing. Buyers are prepared to look at more affordable areas where previously these areas would not have been on their list of potential areas for consideration. In many cases, our agent team will not even consider discussing areas until a pre-qualification based on affordability has been completed, and buyers are very appreciative of this process.

He says, in his view, there is still a high level of distress in the market. “Many sellers have really gritted their teeth and hung on under difficult circumstances and as a last resort are calling for assistance from the bank. In many cases our agent team are being asked to advise on what the sellers should be doing.

“Sellers’ expectations are still very unrealistic in terms of what they believe they can achieve for their homes, but it is more out of desperation than anything else. My advice is that such sellers should open discussions with their banks, who are willing to assist.”

Tjaart van der Walt, CEO of the RealNet estate agency group, says many young couples are now seeking to buy homes that will provide room for their families to grow without having to move. “This prevents repeated transaction costs such as transfer duty, bond registration, legal fees and other moving costs."

“There is definitely a school of thought now that says homeowners should not move too often but rather stay put, pay off their home loans and build up their equity, and in keeping with this, family-size homes in older suburbs are regaining popularity.

“We are seeing many young executives and professionals who might previously have preferred a lock-up-and-go apartment in the city or a home in a country estate now looking instead for fixer-upper houses in established areas, even if these are a bit big for their current needs.”

The idea, he says, is basically to spend money over time on renovating these properties and increasing their value to boost the owners’ equity, instead of spending it on moving repeatedly to accommodate a growing family, or perhaps even ageing parents.

“Proximity to places of work and the prospect of less time spent commuting is another consideration for many who are once again choosing to live in the older suburbs, while others are influenced by the need for a property with space to accommodate a home office or business that will be easily accessible for clients.”

Ketcher says consumers wishing to enter the property market should put aside some money every month and build a “kitty” of savings for that moment when they are ready to purchase a home. “This is also a good test of affordability because if you can put aside something every month then you are preparing yourself for that fixed commitment when you do obtain a mortgage to purchase a home.

“I worry a little about the wording ‘dream home’. We all strive to have a dream home, but unless you build to your own specifications, it is not always possible to achieve exactly what you want. I would always advise buyers to start small. I would also encourage buyers to do their research into the property market sooner rather than later i.e. study suburbs, learn more about the prices of properties in areas they like and then to determine what kind of repayments are necessary at certain price levels – this can be a fun experience and will definitely “wisen” one up about the market.

“This is particularly relevant for first-time home buyers, and I am sure many agents are prepared to add value in this process.

As a last word of advice, Reynolds says she would still encourage buyers to use their bonds as a vehicle for “controlling debt” by paying in excess of their minimum monthly instalments and consolidating their debt in a home loan. “This is much better than using credit cards and entering into other expensive credit agreements. We all need to adopt a saving mentality to safeguard ourselves against volatile financial markets, and buying within one’s means, instead of overextending oneself, is the best advice I can offer.” – Eugene Brink

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