Buying a home is often the single biggest investment most people make. The largest proportion of home buyers seek a mortgage bond. As a result it is essential for buyers to ensure they are fully prepared for making a bond application.

The better prepared, the better the chance of getting the application approved. Rhys Dyer, Chief Operating Officer, South Africa’s leading bond originator, answers ten questions for new homebuyers to consider:

How much can I afford to spend on a home?
Before you look for a home it is important to know exactly how much money you can borrow and, most importantly, what monthly repayments you can afford. Affordability should be used as the main factor in deciding the loan amount to apply for. Banks will generally be comfortable should you be able to prove that you have sufficient disposable income after tax and all your monthly expenses to meet the monthly home loan repayment. If the repayment on the property you are looking to buy requires you to cut your monthly expenses to unrealistic levels, your loan will likely not be approved. Your bond originator will be able to help you in calculating and determining what amount you should consider.

Do I qualify for all the criteria that banks consider before awarding a loan?
Ensure that all your paperwork is ready for submission. Employment history is very important as it reflects a pattern of stability and income. For most lenders a consistent income stream is a key criterion when working out how much one can borrow. Lenders will also want to look at your credit history, so that they can see a pattern of borrowing and repayment as well as how you have managed you bank accounts and other credit facilities.

Why should I consider a bond originator? – www.mortgagepluscc.co.za
Bond originators specialise in shopping around with multiple banks to give you the best chance of getting your deal approved on the most beneficial terms. Banks all have very different criteria for assessing credit and in how they price loans, so the terms you obtain from one bank may be very different from another bank. The bond originator will work with you to ensure a home loan best suited to your individual needs.

Will I benefit from being prequalified for a home loan?
When looking for a new home it is strongly advisable that you are pre-qualified to give you a good sense as to the value of the property that you will be able to purchase. The pre-qualification process can also pick up credit issues on your record that would need to be fixed before you can formally apply to a bank. The pre-qualification process not only streamlines the home buying process, but also ensures the buyer is able to negotiate from a position of strength. Ask your estate agent or your bond originator to assist you with the pre-qualification process.

In addition to the monthly repayments, can I afford the additional costs?
Make sure you are aware of all the costs involved in buying a home. In addition to arranging a home loan and potentially putting down a deposit there are a number of other costs involved including legal costs, transfer duty, bond registration fees, and bank charges. These fees can stack up quickly and they have to be paid in order to complete the process. Over and above these ensure you have taken into account all the costs of home ownership including your monthly rates, levies and costs of insuring your home.

How can I get the best interest rate?
The lower the bank’s risk in lending funds to a consumer, the better the rate it will be able to offer. In calculating the risk, factors such as the loan-to-value ratio (the amount of deposit you are willing to put down to offset against the purchase price thus reducing the required loan amount), the size of the loan, as well as the repayment-to-income ratio (the ratio between the bond re-payment and the buyer’s income) are considered. Currently the size of the deposit is a key factor driving the rate at which banks are prepared to do business. The size of the bond for which you apply, your credit history and the investment value of the property you intend buying are some of the factors that may affect the rate you will be offered.

Consider fixed interest rate options
With interest rates currently at 35 year lows, one may want to give consideration to fixing the interest rate on your home loan when you apply for a bond. Lenders will often set a fixed rate bond at a slightly higher level than a variable rate bond; however, if you are working to a tight monthly budget, a fixed rate option removes risk and might be a prudent decision.

Can I afford to put down a deposit?
Besides improving your chances of getting your home loan approved, a deposit will result in a more favourable bond rate which will save you in interest over the term of the loan. As a home loan is paid back over a long period, generally between 20 and 25 years, even a small deduction in the interest rate on your bond, can save you thousands in interest payments over time. 100% loans are available, but the credit criteria imposed on 100% loans are very restrictive, and our advice would be to put down as large a deposit as you possibly can to ensure the best chance of home loan approval.

Consider the location of the property
The old adage of location, location, location still rings true for most South African homebuyers. Buying in the right area now can reap dividends in the long term when you choose to sell the property. It is important to get some idea of what the area you are looking to buy in may look like ten years down the line, as the demographics of an area can change relatively quickly.

Be Transparent
Always be completely transparent with your lender or bond originator. If you do not provide all the relevant information, likelihood is that the bank will pick it up and decline your loan. “Full disclosure” should be your mantra. Work with your estate agent and chosen bond originator to ensure that the property you are looking for is one that you can afford.

Please contact us if you require any further information or would like to apply for finance:

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morne@mortgagepluscc.co.za

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Property finance: NCA not only problem

The National Credit Act (NCA) has put a dampener on property buying and selling, but it is only one part of the bigger property financing problem.So says John Loos, property economist at FNB, who adds that he is doubtful that the NCA is the major brake on the housing market at present.

“I think that a lot of banks’ tight credit criteria has to do with the very risky period that we live in currently, and not merely because of a law that requires it. The reality is that there has been a lot of bad debt around which has hurt the home lending sector, the household sector’s financial condition following the recession is not healthy, and the world currently faces the risk of a double-dip recession, which would have a big impact on the household sector’s financial situation again were it to materialise.

“NCA or no NCA, the current economic times arguably make conservative lending policies suitable, and I doubt that much would change right now were the NCA to be instantly dropped. It isn’t as if the household sector has low levels of debt. To the contrary, the levels of indebtedness are generally high by historic standards.”

He says the NCA still has use in promoting responsible lending, “but it would probably have more of an impact on lending levels during good economic times when lenders instinctively want to be more aggressive”. “Currently the risky economic times mean that lenders don’t need much encouragement to be relatively conservative.”

“I think, though, that SA – along with some other Western countries – need to begin to look at something more troublesome than tight lending criteria, and that is our household sector’s high dependence on credit, especially credit for consumption purposes.”

Lew Geffen, chairman of Sotheby’s International Realty in SA, says the rich in SA’s property market are getting richer while the poor get poorer because of the way the NCA is being applied.

“The wealthiest homebuyers – or actually those considered most creditworthy by the banks – often don’t actually need bank finance, and so are able to upgrade and invest now at good prices which will enable them to gain maximum advantage from the next market upturn.

“But the lack of access to credit because of the way the banks are applying the NCA is shutting poorer buyers – or rather those with smaller cash reserves – out of the market and denying them the opportunity to build wealth through home ownership.

“In fact, the door has not just been closed on them, it has been slamlocked, and the worst affected are black buyers who can afford monthly bond repayments, but have not had time to build up extensive credit histories or asset bases that would make them better risks in the eyes of the banks.”

In 2007, he points out, at least 25% of home sales by his company were to newly-wealthy beneficiaries of BEE. “But after the introduction of the NCA in 2008, the percentage of black buyers in traditional suburbs dropped back to 15% and now we are back at 5% – which is where we were in 1994, just after the first democratic election.”

Geffen says that in previous property cycles, low property prices and relatively high rentals always signalled an upturn in the property market as tenants realised that they could afford the monthly bond repayments on a home of their own just as easily as the rent they were paying.

“But this is not happening this time around. Although there is enough demand to send the market back into a boom phase, the process is being blocked by the banks using the NCA to discriminate in borrower selection, and many people who could quite well afford to become homeowners are being forced to remain tenants.”

He hastens to say that he supports the idea of homebuyers having equity in their properties in the form of deposits, “but I also believe there should be one set of rules for everyone”. “At the moment some people are getting 100% bonds at lower interest rates while others are only able to get 70% bonds at higher interest rates.

“This is akin to the notorious redlining practices of the 1980s and 90s, the only difference being that the focus now is on keeping certain borrowers out of the lending picture rather than certain areas. And it is hardly what was intended when the NCA was introduced, which was essentially to protect consumers from unscrupulous lending practices.”

Loos says the problem in SA is not low levels of borrowing but, rather, high levels of borrowing and low levels of saving. “We don’t have nearly enough national saving to fund our huge fixed investment requirements, and household saving is definitely the weak link here (with government saving also being troublesomely low). And so, not surprisingly we have under investment in infrastructure, and the cracks are showing all over the place. And so, the savings shortage places huge constraints on SA’s long term economic growth potential, and thus its job creation potential.”

He says banks, by tightening up on lending in recent years, have merely unintentionally exposed SA’s weakness of low savings.

“By requiring deposits again on home loans, SA’s savings shortage has been highlighted by the many people who don’t have the cash on hand for the deposit required. Is the ultimate solution to lend more or somehow encourage more household saving? I think the latter would, in principle, be the real solution to the problem. I have to admit that the solution to the savings shortage is a complex one, and don’t have all the answers as to how this would be achieved, but merely making credit more available definitely isn’t the solution.” – Eugene Brink

By choosing Mortgage Plus for a loan, you will get that continual service to make sure you are getting the best deal possible.

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Speak to a home loan consultant about financing your new property or reviewing your existing mortgage. We are able to assist in lowering your bond repayments and securing attorney discounts.

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