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Is a R51k salary enough to comfortably afford bond repayments?

Jul 12, 2023

Viral Twitter thread sparks property industry debate 

bond repaymentsRecently, a hypothetical question was posed around what South Africans could afford on a R51 000 net salary. This became a trending topic on Twitter, sparking debates over whether these earnings would be enough to cover both bond and new car repayments.

This hotly contested discussion stemmed from a news article that reported that a Free State education official was under investigation by the Hawks for purchasing four luxury cars on a R50 000-plus net salary.

While the resulting Twitter thread was largely humorous, it raises an interesting question: what salary is needed to comfortably afford home loan repayments in the current environment of high interest rates?

To work out what one can afford on a R51 000 net salary (off a gross salary of R70 000), ooba Home Loans CEO Rhys Dyer used ooba’s free online bond calculator tool.

What R51k net gets you

“As a rule of thumb, your home loan should not exceed 30% of your gross salary per month,” Dyer explains. “Based on this, you would qualify for a maximum home loan of just under R2 million. At the current interest rate of 11.75%, monthly bond repayments equate to R21 000 per month (over a 20-year repayment period). However, ooba customers benefit from an average rate concession of 40bps below prime, meaning that these repayments would be significantly lower.”

Taking it a step further and looking at whether this net salary amount of R51k can cover both your bond and vehicle repayments, Dyer adds the following: “As the industry standard, vehicle finance should not exceed 25% of your gross salary so in this case, a vehicle repayment of R17 000 per month qualifies you to buy in the price range of about R750 000 (using a five-year term).”

Answering the question of whether R51k is enough, Dyer cautions: “It is risky to max out your spending on a home loan and vehicle finance. The amount left over in this case is R13 000 which almost certainly is not enough to cover any other debt obligations and general expenses.”

He adds: “Our latest ooba home loans data shows that the average home loan repayment amongst our homebuyers in Q1 2023 was just slightly over 20% of their gross income, comfortably below the 30% industry benchmark.  Buyers are prioritising smart financial decisions, rather than maxing out their homebuying budget.”

Getting credit ready in a high interest rate environment

Dyer notes that beyond your monthly salary and your current monthly debt repayments and living expenses, the banks will also look at your credit score and credit history prior to approving you for a home loan.

“In a high interest rate environment, achieving an interest rate below prime is of crucial importance. To boost your chances prior to applying, be sure to know and bolster your credit score. A good score is anything from 650 to 800-plus.”

Dyer shares the following tips for improving your credit score:

  • Ensure that you have ‘good’ debt to build a credit history. You need to have a history of repaying your debts to build your credit history. An example of this is applying for a credit card, but do not spend over 30% of your credit limit.
  • Close your credit accounts once you’ve paid them off. Having a large number of credit accounts linked to your name is detrimental to your credit score, even if there is no longer an amount outstanding.
  • Beware of ‘hard inquiries.’ When you apply for a significant loan, like a car or home loan, or a credit card, the lender performs a ‘hard inquiry’ which can affect your credit score. Avoid applying for these kinds of loans in the six months before your home loan application.
  • Go beyond the minimum. While paying your instalments on time and in full should be a given, remember that there is no limit on how much extra you can pay back every month. Demonstrating on your application that you have a history of repaying your debts in a shorter time than expected is very beneficial for your credit profile in a high interest rate environment.

“Boosting your credit score, putting down a deposit and using a bond originator to secure multiple quotes (and therefore interest rates) from the banks give you the best chance of securing an attractive rate in the current environment and ensuring your affordability,” Dyer concludes.

This post was based on a press release issued on behalf of ooba Home Loans.

 

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Maya Fisher-French author of Money Questions Answered

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