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How banks assess affordability for a home loan

Jul 6, 2023

With interest rates at their highest levels in 14 years, many would-be homeowners are finding it difficult to meet the affordability requirements for a home loan.

How banks assess affordability for a home loanAccording to the latest statistics from ooba Home Loans, while the country’s average purchase price for a property has grown slightly, the size of bonds granted has actually decreased.

Based on ooba’s origination book, first-time buyers are experiencing a 2.7% drop year-on-year in the average approved bond size, and the percentage of successful bond approvals from the banks has also decreased this quarter, now at 66.2% from 67.9% at the end of 2022.

While many people refer to a rule of thumb whereby banks approve a home loan where the monthly payment is less than 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.

According to Kay Geldenhuys, ooba Home Loan’s Head of Sales Fulfilment, 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 for most applicants, the bank would approve up to 20% of gross salary as an instalment.

We asked the banks what their policy was when it came to assessing affordability.

Is 30% of gross salary a hard-and-fast rule?

According to Absa, the bank has a threshold which allows them 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 affordability of applicants.

Capitec says the affordability assessment, mandated by the National Credit Act (NCA), follows a hard-and-fast rule of a maximum instalment of 30% of gross salary. “Each application then undergoes an individual assessment, where the maximum guideline for the Payment to Income Ratio (PTI) is set at 30%. If the applicant’s affordability is not in question, we can exceed the 30% PTI level. Conversely, if affordability can only be achieved at a 20% PTI, then the 20% PTI becomes the maximum allowable.”

Angela Glover, Head of Product at FNB Home and Structured Lending Solutions says the bank has various rules in place to determine whether it believes 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.”

Nedbank’s Head of Home Ownership, JP Viljoen says affordability assessments are conducted on a case-by-case basis, taking into account various factors such as income, expenses, credit history, and other financial obligations. “As such, there may be instances where the instalment level exceeds the guideline threshold set by a bank, depending on the applicant’s overall financial profile.”

Standard Bank says it will exceed the 30% payment to income ratio in selected instances.

What factors are considered when banks assess affordability?

Absa says the bank performs a cash flow calculation that considers an applicant’s income and expenses, where the income declared is validated against the salary, bank statements and any other documents provided for verification purposes.

“Debt commitments declared are validated against a credit bureau report and living expenses are validated against the National Credit Regulator’s living expenses norms. Bonds to be settled are also considered, as well as any other debt that will be cancelled before the new bond is registered. We also take future income such as salary increases and future rental income into account.”

FNB considers all living expenses (including food, transport, water and electricity, cellphones, school fees, medical aid, insurance, etc), all existing credit agreements (credit cards, personal loans, car loans, etc) and any other monthly expenses you may have.

“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 salary or wages, as well as any other verifiable regular income, such as rental income on an investment property.

Are deposits becoming a requirement?

Jackie Smith, Head of Buyers Trust, a bank-hosted deposit solution for homebuyers and subsidiary of ooba, 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 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 being presented with a deposit are always viewed in a positive light by lenders, as it demonstrates the applicant’s commitment to the loan, and it provides the banks with a level of security.

“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 it 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 first-time home buyers.”

Check your affordability before applying for a home loan

If you are wondering whether you meet the affordability requirements for a home loan, you can use the ooba online portal to check your credit score and then use their affordability calculator to see what amount you qualify for. You can also receive a pre-qualification certificate valid for 90 days.

The latest oobarometer shows that 90.4% of homebuyers who undertook the pre-approval process were approved for a home loan in Q1 of 2023.

This article first appeared in City Press.

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Maya Fisher-French author of Money Questions Answered

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