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With interest rates at the highest level in 14 years, many would-be homeowners are finding it difficult to meet the affordability requirements. According to the latest statistics from Ooba Home Loans, while the country’s average purchase price for a property has grown slightly, the size of the bonds granted has actually reduced.
Based on Ooba’s origination book, first-time home buyers are experiencing a drop in the average approved bond amount by -2.7% year on year. The percentage of bond approvals from the banks has also decreased this quarter – to 66.2% from 67.9% at the end of last year.
While there are references to a rule of thumb that banks approve a home loan with an instalment of up to 30% of your gross salary, this still depends on your actual affordability, which is very personal.
One person may have a high percentage of disposable income, while another may have obligations and debts that reduce their affordability.
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According to Kay Geldenhuys, Ooba Home Loans’ head of sales fulfilment, the bond originator’s figures show that the average “instalment-to-gross income” ratio for a single applicant home loan processed in the first quarter of this year was just 20%. In the case of joint home loan applications, this ratio was 18%.
This means that, for most applicants, the bank would approve up to 20% of gross salary as an instalment.
City Press asked several banks what their policy was when assessing affordability.
IS 30% OF GROSS SALARY A HARD AND FAST RULE?
According to Absa, the bank has a threshold which allows it to exceed 30% of gross salary “with the circumstances of each applicant being considered holistically to arrive at an affordable outcome”.
The decision will be based on the customer’s total level of debt commitments to their income and their credit risk profile. However, the bank is experiencing a general decline in applicants’ affordability assessments.
Capitec says the affordability assessment, mandated by the National Credit Act, follows a hard and fast rule of a maximum instalment of 30% of one’s gross salary.
Capitec says:
Angela Glover, head of product at FNB Home and Structured Lending Solutions, says the bank has various rules in place to determine whether the repayment is within the customer’s means.
“Instalment as a percentage of income is one such variable that we use, in conjunction with a view of your monthly budget and expenses,” Glover says.
Nedbank’s head of home ownership, JP Viljoen, says affordability assessments are done on a case by case basis. These take into account various factors such as income, expenses, credit history and other financial obligations. “As such, there may be instances when the instalment level exceeds the guideline threshold set by a bank, depending on the applicant’s overall financial profile,” says Viljoen.
Standard Bank says it will exceed the 30% PTI ratio in selected instances.
WHAT IS CONSIDERED IN ASSESSING AFFORDABILITY?
Absa says it performs a cash flow calculation based on an applicant’s income and expenses.
The income declared is validated against the applicant’s salary, bank statements and any other documents provided for verification purposes.
FNB considers all the living expenses (such as food, transport, water and electricity, cellphones, school fees, medical aid and insurance). All existing credit agreements (credit cards, personal loans, car loans) and any other monthly expenses you may have are scrutinised.
“If you are applying with another person or people, you can declare which of your expenses are shared versus those which are yours only, to enable an accurate assessment.”
On the income side, FNB considers all salaries or wages, as well as any other verifiable regular income, for example, rental income on an investment property.
ARE DEPOSITS BECOMING A REQUIREMENT?
Jackie Smith, head of Buyers Trust, a bank-hosted deposit solution for home buyers and subsidiary of the Ooba Group, says their statistics show a nearly 12% increase in the average size of deposits.
“The average size of a deposit is 7.5% of the purchase price, but, for the first-time buyers, the average deposit is 9.7% of the purchase price, just a fraction away from the optimal 10%,” Smith says.
Nedbank says applications presented with a deposit are always viewed in a positive light by lenders, as it demonstrates the applicant’s commitment to the loan. It also provides the banks with a level of security.
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“Furthermore, a large deposit will result in a lower loan-to-value ratio, which can lead to more favourable loan terms, including a lower interest rate because of the reduced risk,” says Viljoen.
Capitec says that deposits are always preferred, as this reduces monthly bond instalments and secures a better interest rate as it is considered lower-risk lending.
Absa says that, while a deposit is preferable, for certain segments of the market a deposit is difficult to attain. “For this reason, we have made provision for 100% lending subject to credit assessment, for example, in our first-time home buyer segment.”
