Improve your chances for a bond approval

“Even with the worst of the recession behind us, combined with the fact that the banks are starting to marginally relax their lending criteria, getting a bond application approved remains a challenge for many,” says Adrian Goslett, CEO of RE/MAX of Southern Africa.

The lending landscape has seen dramatic changes over the last few years – practices that were once acceptable have changed in lieu of stricter regulations and controls. Says Goslett: “Stricter lending criteria due to the National Credit Act (NCA) has been, to a large extent, blamed for the decline of the property market in recent years. However, the truth is that the decline is not solely due to the NCA, but rather as a result of an amalgamation of various factors, including the world-wide recession, the fluctuating interest rates, inflation and so on.”

He says that although it remains much more difficult to get an approved home loan today, it is important to recognise that to a large extent, it was the NCA that saved South Africa from going the same route as America and the UK when their property markets bottomed-out. “Today, loan underwriting standards remain pretty stringent as the banks are taking every precaution necessary to ensure that they don’t fall victim to another financial crisis.”

Against this background, Goslett discusses the top five points to consider when applying for a home loan to ensure a better chance of approval:

1. 100% home loans: Just over a year ago, 100% bonds were all but extinct. They have re-emerged today. There is considerably more risk involved in granting a 100% home loan, the lending criteria will be stricter and the overall approval rate on these applications is therefore much lower.

2. Affordability: A simple calculation involving an applicant’s gross income, net income and fixed monthly expenses will provide insight into their monthly expendable income. South African credit legislation governing mortgage lending dictates that mortgage lenders may not grant a bond of which the monthly repayments are larger than one-third of your monthly net income. Most banks work out the amount that an applicant will qualify for using the repayment to income (RTI) of 30%, in conjunction with the available disposable income. This means that the person with very little outstanding debt will qualify for a considerably higher loan amount, as they will have more disposable income. However, those individuals who are already highly geared often won’t be approved for a home loan as their debt-to-income ratio exceeds the NCA’s guidelines.

3. Stable income: Often applicants don’t have consistent proof of income for the last three years. Regardless of how good their credit rating and current rate of disposable income is, if they can’t show the bank continued proof of income, loan approval will be tough.

4. Credit rating: A less than perfect credit record will negatively influence a bond application, and in extreme cases, bad credit may even lead to bond approval being refused. Any lender will undertake credit checks on all home loan applicants, which will provide them with information on how much credit they have applied for, the state of their credit accounts, how they have been managed and their blacklist-status. Credit scores aim to predict how likely the applicant will be to honour their credit commitments in the future. To a large extent, loan approvals are based on the applicant’s credit scores, as it is used by lenders to identify the risk in offering them credit.

5. Self-employment: More and more South Africans are opting to become entrepreneurs – some because they were made redundant by the recession, others because they believe it offers a better lifestyle, and some because they believe they can earn considerably more this way. However, in compliance with the NCA, lenders have to be especially careful about lending money to people who are employed in positions that might be considered “insecure”. As such, self-employed individuals usually struggle to qualify for a bond.

In April 2008, only 24% of home loan applications were converted into granted bonds – a radical decline compared to the boom years of 2005 and 2006 where 78% of all home loan applications were granted. Since October last year there has been a gradual improvement in the success rate of bond approvals, and currently around 50% of all home loan applications are successful.

This is mainly due to the banks relaxing their lending criteria to a certain degree, as well as the fact that property prices have now adjusted downwards to a “new normal”. But while the banks have eased up on their lending criteria, it is still important for them to ensure that the loan applicant can afford to meet the monthly repayments. Therefore, as a property buyer, it is important that you watch your credit rating carefully, save up for a deposit if possible, and make sure you have all the necessary documentation at hand when applying for your loan.

Article by: