The good news regarding home loan approval is that since the last few months of 2014 banks have shown an increased appetite for this type of lending and have become more competitive in their hunt for mortgage bond applications.
Smyth says far more applications could be successful, if there was an ongoing educational programme clarifying the criteria that has to be met to obtain a mortgage bond.
This is according to John Smyth, a director of Multi NET, who says the whole situation could be further improved, and far more applications could be successful, if there was an ongoing educational programme clarifying the criteria that has to be met to obtain a mortgage bond.
“Our experience shows quite clearly that ignorance of how the system works, as much as any other factor, is what prevents many people from qualifying for home loans. This lack of knowledge is apparent across all income groups,” says Smyth.
Smyth summarises the criteria for potential applicants:
Smyth says the first straightforward criterion for banks is affordability: does the applicant earn enough to be able to meet his monthly home loan repayments? The banks will insist on the applicant’s income being sufficient to allow him to comfortably pay 30% of his monthly salary on the home loan.
The second criterion is the level of debt already incurred. Smyth says quite often, the applicant’s income may be sufficient to comply with the 30% ruling, but he will then be rejected because his ‘net disposable income’ is found to be inadequate.
He may well have committed himself to a range of other monthly expenses, on anything from educational fees to cars, clothing, holidays and so on, and these combined may stretch his net disposable income to the upper limits.
3. Payment history
Thirdly, Smyth says the applicant may be rejected because he has defaulted on previous payment commitments, for example, on hire purchase accounts. In South Africa, the credit bureaux are kept informed of these lapses in payment and, unless reparation has been made, they are likely to be seen as indicating that the applicant is a poor credit risk.
Smyth says the obstacles in the way of a successful loan described here could be much reduced if the financial institutions were to take on the task of educating potential borrowers on the whole subject of home loans and on how to budget.
“It is often said that during the 2002 to 2007 boom years South Africans, especially those new to middle class status, were encouraged by too easily accessible credit to be spendthrift. However, since the introduction of the National Credit Act, this trend has been restrained,” he says.
“Today I believe it is, as much as anything else, the continually rising cost of living with regards to food, education, electricity, services and petrol which is preventing people from becoming homeowners.”
Smyth says potential borrowers now more than ever need to be coached on how to budget accurately.
“With training of this kind, I know a great many more South Africans could become homeowners.”
Nevertheless, he says it is a proven fact that those who consult an independent bond originator have a 20% to 30% better chance of getting a home loan than those who deal with only one bank or go the DIY route in dealing with a range of banks.
“What is more, the bond originators, most of whom deal with all major retail banks, generally achieve not only a higher hit rate, but also better terms and conditions for their clients,” says Smyth.