How much can I borrow for a mortgage?

One of the first questions everyone asks when they are thinking of buying a property is ‘how much can I borrow?’ This is not an exact science and all banks have methods to calculate affordability. Since the introduction of the National Credit Act, this has become even more complicated. The most accurate method of establishing how much you are eligible to borrow is to contact a qualified mortgage broker – 011.327 .4489

Salary Multiples

A mortgage lender will lend you money based upon what they think you can afford to repay on a monthly basis. The calculation they used to use is broadly that 30% of your gross monthly income must be your maximum monthly mortgage repayment. Therefore if you earn R20,000 per month gross then your maximum repayments should be R7,000.

Under the National Credit Act, lenders now have to base your eligibility calculations on your monthly ‘disposable income’. To calculate this you need to take your gross income, less all the deductions like tax and UIF to get your Net income. They then calculate what your total monthly expenses are; groceries, car insurance etc, and finally they subtract all you month commitments to any existing debt you have such as credit card, vehicle finance, or loan repayments. The balance (if there is one) is your maximum monthly mortgage repayment.

The banks normally add in a ‘buffer’ for interest rate rises etc, so you may actually only qualify for 85% of this figure. You then need to work backward to get the actually bond amount these monthly payments will allow you to service.

A lender will look at your bank statements and your regular outgoings to check that the expenses you have declared are in line with your outgoings on your bank account. They also have access to the Credit Bureau’s information so they can check that the liabilities that you have declared are correct. If you run a tight ship with regard to your finances, you may be able to get a bigger mortgage than you would do under the traditional salary multiple guidelines. Conversely, if you’re already ‘maxed out’ with credit cards and personal loans, you may not get offered as much.

The National Credit Act (NCA) means lenders will be tightening their credit policy so as not to fall foul of the ‘reckless lending’ as laid out in the Act. This will not only mean that lenders will start using individuals net income for their calculations, but also they will look specifically at what other borrowings the applicant may have before they make a decisions on the applicants borrowing eligibility.

For a quick check to see how much you are eligible for please go to our mortgage calculators. The various lenders do vary in how much they will lend you depending on their individuals assessment of your risk.

Other Income

Lenders will take into account other income that you may have such as rental income, investment and dividends etc. Again, lenders do vary in how they view secondary income streams. Therefore you should always speak to your Mortgage Plus consultant to assess your full range of options.

As a rule of thumb lenders will take into account 50% of your rental income on a rental property. It is up to you as the borrower to prove this income. You must be able to show money going into your bank account and lease agreements. The longer the lease, the more they will value the rental income.

You can also take into account ‘contributions’ from other family members if they are living in your property. If a partner, or child is making a contribution to the ‘family finances’ then the banks will use it. Again, the onus is on you as the borrower to prove this.

Commission earner

If you are a commission earner the banks will take this into account. However, the best way to prove this to the bank is to provide six months payslips and calculate the average commission earnt.

Annual bonuses

These can also be taken into account but you will have to prove them with entries on your bank statements and letters from your employer.

Self-employed individuals

It is harder for banks to lend to self-employed individuals because it is often harder to prove the income. The better you manage your accounts (and the more accurately) the easier it is for the banks to lend to you. Proof of your income will have to be provided in the form of Audited Financial Statements, latest management accounts and six months bank statements, as well as a letter from your accountant verifying your income.

Partners / Spouse’s income

If you are purchasing with a partner or spouse then lenders will take their income into account.

Note: Remember that banks want to lend money. That is how they make money. The banks have come under considerable pressure since the introduction of the National Credit Act not to ‘lend recklessly’. Make it easy for a lender to grant you a loan by managing and recording your finances carefully.

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

Complete this short form online

011.327.4489 / 0861 1111 93

morne@mortgagepluscc.co.za

www.mortgagepluscc.co.za

Then build up to your dream home.

Most people who are shopping for a home have something specific in mind, but often what they can afford to buy doesn’t match the mental picture.

When looking around for a home these days, buyers often have to make some kind of compromise between price and the home’s features. We would all love to be able to buy our dream home, or even build it from scratch so that it suits our requirements perfectly. However, many are not in the financial position to do this.

Bearing the current mortgage market conditions and affordability factors in mind, coupled with the fact that the interest rates are set to increase this year, possibly even sooner than many think, the best place to start is to buy small and then build up to your dream home.

While now is a good time for buyers to get into the property market, they have to be realistic about what their money can buy. Although first time buyers may not be able to start out in their dream home, they can still enjoy the benefits of homeownership in a more affordable starter home.

Accommodation requirements change over time, and therefore, young couples or up-and-coming executives or any first time buyer for that matter should not be afraid to start off with a modest home or apartment that will serve their needs well for a few years as well as fit into their budget.

The best place to start paring down the must-have features is to make a list of all the features you would want in your dream home like a home theatre, swimming pool or large entertainment area, for example. Keep that list to work towards in the future and make a separate list of all the features you feel you could not live without like a certain number of bedrooms, security etc.

While the features you cannot live without may not be conducive to a space that is, for example, ideal for large-scale entertaining, remember that a starter home or apartment will come at a much smaller price tag. Added to this, after a few years, you will have acquired some equity in the home, making it easier for you to move up to a bigger, more accommodating space when you sell. In addition, the less money a buyer spends on a home now, the smaller the deposit that will be required for payment upfront.

While buyers may need to be negotiable on certain features of a property in order to accommodate their budget, here are some pointers that can minimise the discrepancy between dream home and starter home and help buyers fast-track their dream home purchase:

1. Start saving for the deposit before you start shopping for a home

The more you have saved up as a deposit, the better your chances of getting a good finance deal

2. First buy a small house with a lower bond

Your first house probably won’t be your dream house, but it can be a good place to start working towards it.

3. Save extra money for other home expenses

Buyers would be wise to have a little savings to draw on to help them pay for items such as new paint, additional furniture and any maintenance or repair work that needs to be done. Ideally buyers should have approximately 5% of the value of the house saved for these costs.

4. Be ready for the worst case scenario

Prepare yourself financially for any worst case scenario. For example, with interest rates set to increase, budget for around 2% increase over the next couple of years and build your financial plan around that number. If things turn out better, you’ll be ahead of the game.

5. Pay off your bond as quickly as possible

It would be ideal for buyers to budget for larger repayments than the minimum required on their bond each month or to pay in lump sums as and when they receive bonuses and the like. Paying off your bond faster can reduce the amount of interest you pay, and if you hit hard times, you will have paid in enough to be able to negotiate terms with your financial institution.

In the current market, buyer affordability is all about working smartly with your money and building up your resources to enable you to afford that dream home.

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

Complete this short form online

011.327.4489 / 0861 1111 93

morne@mortgagepluscc.co.za

www.mortgagepluscc.co.za