Improve your chances for a bond approval

“Even with the worst of the recession behind us, combined with the fact that the banks are starting to marginally relax their lending criteria, getting a bond application approved remains a challenge for many,” says Adrian Goslett, CEO of RE/MAX of Southern Africa.

The lending landscape has seen dramatic changes over the last few years – practices that were once acceptable have changed in lieu of stricter regulations and controls. Says Goslett: “Stricter lending criteria due to the National Credit Act (NCA) has been, to a large extent, blamed for the decline of the property market in recent years. However, the truth is that the decline is not solely due to the NCA, but rather as a result of an amalgamation of various factors, including the world-wide recession, the fluctuating interest rates, inflation and so on.”

He says that although it remains much more difficult to get an approved home loan today, it is important to recognise that to a large extent, it was the NCA that saved South Africa from going the same route as America and the UK when their property markets bottomed-out. “Today, loan underwriting standards remain pretty stringent as the banks are taking every precaution necessary to ensure that they don’t fall victim to another financial crisis.”

Against this background, Goslett discusses the top five points to consider when applying for a home loan to ensure a better chance of approval:

1. 100% home loans: Just over a year ago, 100% bonds were all but extinct. They have re-emerged today. There is considerably more risk involved in granting a 100% home loan, the lending criteria will be stricter and the overall approval rate on these applications is therefore much lower.

2. Affordability: A simple calculation involving an applicant’s gross income, net income and fixed monthly expenses will provide insight into their monthly expendable income. South African credit legislation governing mortgage lending dictates that mortgage lenders may not grant a bond of which the monthly repayments are larger than one-third of your monthly net income. Most banks work out the amount that an applicant will qualify for using the repayment to income (RTI) of 30%, in conjunction with the available disposable income. This means that the person with very little outstanding debt will qualify for a considerably higher loan amount, as they will have more disposable income. However, those individuals who are already highly geared often won’t be approved for a home loan as their debt-to-income ratio exceeds the NCA’s guidelines.

3. Stable income: Often applicants don’t have consistent proof of income for the last three years. Regardless of how good their credit rating and current rate of disposable income is, if they can’t show the bank continued proof of income, loan approval will be tough.

4. Credit rating: A less than perfect credit record will negatively influence a bond application, and in extreme cases, bad credit may even lead to bond approval being refused. Any lender will undertake credit checks on all home loan applicants, which will provide them with information on how much credit they have applied for, the state of their credit accounts, how they have been managed and their blacklist-status. Credit scores aim to predict how likely the applicant will be to honour their credit commitments in the future. To a large extent, loan approvals are based on the applicant’s credit scores, as it is used by lenders to identify the risk in offering them credit.

5. Self-employment: More and more South Africans are opting to become entrepreneurs – some because they were made redundant by the recession, others because they believe it offers a better lifestyle, and some because they believe they can earn considerably more this way. However, in compliance with the NCA, lenders have to be especially careful about lending money to people who are employed in positions that might be considered “insecure”. As such, self-employed individuals usually struggle to qualify for a bond.

In April 2008, only 24% of home loan applications were converted into granted bonds – a radical decline compared to the boom years of 2005 and 2006 where 78% of all home loan applications were granted. Since October last year there has been a gradual improvement in the success rate of bond approvals, and currently around 50% of all home loan applications are successful.

This is mainly due to the banks relaxing their lending criteria to a certain degree, as well as the fact that property prices have now adjusted downwards to a “new normal”. But while the banks have eased up on their lending criteria, it is still important for them to ensure that the loan applicant can afford to meet the monthly repayments. Therefore, as a property buyer, it is important that you watch your credit rating carefully, save up for a deposit if possible, and make sure you have all the necessary documentation at hand when applying for your loan

Remember by choosing us for a loan, you will get professional advice to make sure you are getting the best deal possible.

CONTACT US

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.

Complete this short form online
Call us on 011.327.4489
Email: morne@mortgagepluscc.co.za

www.mortgagepluscc.co.za

Advice to Bond Applicants – take account of future rate increases

Advice to today’s bond applicants: take account of the inevitable future rates increases – or you could suffer.

With the interest rates at their lowest levels for some 30 years (the nearest we have recently come to the current levels was in April 2005 when the rate was 10,5%), home buying looks very attractive – and, says Rawson Properties MD, Tony Clarke, his group is witnessing a much stronger demand and a renewed willingness to consider homeownership.

But, warns Clarke, there is a serious danger here: many buyers will assume that the current low rates will be maintained for a long time and, thinking this way, they may easily over-commit themselves on their bond payments, only to find that when rates do rise “as they inevitably will”, they are in trouble.

“If one thing in financial circles can be predicted with absolute certainty,” said Clarke, “it is that today’s very favourable rates will not last for ever.

“One has only to look at the interest rate’s recent performance to understand how regularly changes occur – since 1990 the rate has changed 63 times. Even more significantly, the average rate over that period was 16,4% – approximately 7% higher than the current rate.”

Two or three years from now, says Clarke, interest rates could easily be at 14 or 15% again.

“While it is true that financial cycles never follow exactly the same patterns as before, it is also true that they do occur.”

So – what advice does Clarke have for the eager buyer now making plans to become a homeowner?

“Assuming that he does qualify for a bond,” says Clarke, “our advice is to pitch the bond application as if the rate will soon be 13,5%, i.e. apply for a bond roughly 20% below the maximum value which the bondholder could now be given. The applicant can work this out with a good estate agent or mortgage originator - let him just make sure that, if and when rates rise, he will not have a problem.

“For example, supposing the bond applicant has a sound credit track record and is a steady salaried employee earning ±R40 000 per month, he might qualify for a bond of R1 million – but we would suggest that he applies for a bond of R800 000. If this means that he has to opt for a less prestigious area or a similar, less luxurious home, so be it. He can upgrade later.

“This is infinitely preferable to finding when rates rise that the higher payments are causing distress.”

Just how significant future interest rises could be, said Clarke, can be seen from the fact that at current rates a R800 000 bond would cost R7 546 monthly. If and when the rates do rise to 13,5%, said Clarke, this monthly payment would rise to R9 656 – an increase of over R2 000 per month.

Clarke also repeated advice given previously, that if at all possible while rates are low, the bondholder should pay above the stipulated monthly rate and thereby shorten the payoff period and build up a savings nest egg.

“Even a few extra hundred rand paid each month will shorten the payback period by years – and it will also reduce the time before an upgrade is possible.”

CONTACT US

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.

Complete this short form online
Call us on 011.327.4489
Email: morne@mortgagepluscc.co.za

www.mortgagepluscc.co.za