While the recession might still be fresh in the minds of some consumers, it appears that more prospective buyers are looking to enter the property market. The good news for these buyers is that banks have relaxed their lending criteria slightly and bond approval rates have increased, says Adrian Goslett, CEO of RE/MAX of Southern Africa.
During the boom years as many as 80 percent of all home loan applications were granted. Currently the bond approval rate is around the 50 percent mark; however, numbers are improving gradually. The increased number of approvals since the recession period is due to more buyers showing affordability and property pricing coming down to more realistic levels. Mortgage originator BetterBond recently noted that the year-on-year the volume of bond transactions that they processed during February 2012 was 63 percent higher than during the same period in 2011.
Although accessibility to finance is more readily available to buyers, Goslett points out a few things that would-be homeowners can do to ensure they are approved for finance:
Because affordability is such an important element of the bond approval process, it seems that it is the natural place for buyers to address first.
A buyer’s affordability is determined by using a simple calculation using the applicant’s gross income, net income and fixed monthly expenses. All these factors will be taken into consideration in order to gain some insight into the buyer’s monthly disposable income.
According to the South African credit legislation that governs the practise of mortgage lending, a financial institution may not grant a bond if the monthly repayments are more than one-third of the applicant’s monthly net income. Banks will generally use a repayment to income (RTI) ratio of 30 percent as well as the available disposable income to work out what amount the applicant will qualify for. The more disposable income available, the more likely the bond will be approved.
For buyers to have the best chance of approval, they will need to reduce debt wherever possible.
Have a deposit
While it is possible to get a 100 percent home loan in certain circumstances, the standard requirement is for the applicant to have a minimum of a 10 percent deposit of the asking price of the home, and in certain cases a deposit of up to 30 percent may be required.
The lower the percentage of the price that is required to be financed, the more likely it is that the buyer will obtain bond approval.
A favourable credit rating
Before an applicant is considered, a lender will run credit checks on them to see whether there are any judgements or payment defaults against their name. The credit check will give the lender an idea of where the applicant has credit accounts and how those accounts are managed.
Keeping a clean credit record and managing credit accounts well will better the buyer’s chances of approval.
A steady income
Generally banks require an applicant to have proof of a consistent income over the last three years. Buyers that maintain a good credit rating and show a stable source of income will be looked upon more favourably than those with impaired credit records.
Many South Africans aspire to become entrepreneurs and own a business. Despite their possible earning potential, business owners that are considered to be self-employed are regarded as a higher risk and, in compliance with the NCA regulations, lenders are more careful when giving loans to people in these positions.
"While more bonds are being granted, it remains up to the buyer to prepare and have everything in order to ensure the best possible chance of a favourable outcome," Goslett concludes.