Home loan hurdles for the mature and self-employed

First-time homebuyers might be finding it easier than it once was to secure a home loan, but the same cannot be said for the mature or self-employed.

It is no easy task getting a home loan for those that fall into either of these two categories, and even more difficult if the unfortunate applicant happens to fall into both.

Preparation of home loan documentation requirements aside, these applicants can look forward to a significantly higher burden of documentation and a prolonged application process, unfortunately.

The age factor 

For the mature − those in their fifties or older − the process could be far more difficult than they might have imagined.

The reason? Home loans normally run over a 20-year period with the term of the loan needing to expire at, or not long after, retirement. That’s to enable the homeowner to pay an amount that is comfortably within their disposable income, an income that is generally considerably reduced after retirement.

Where it is not possible to grant a 20-year loan due to the applicant’s age, the loan term is shortened and the repayment amount becomes significantly larger. To combat this, a higher deposit is more often than not required.

While application cut-off age varies from bank to bank (some, like Absa and Investec, don’t have a specific age limit), at FNB that age is 65 and the bank’s policy requires the loan to be settled by age 75.

“Mature home loan applicants are typically able to put down much greater deposits than newer entrants to the property market. This usually puts them in good stead in terms of the likelihood of being approved for a home loan. Provided that they have managed to maintain a good credit record, they should also typically benefit in terms of this given their longer term track record,” Tommy Nel, head of credit at FNB home loans, tells finweek.

“Consumers, however, have to carefully consider taking on large debt commitments, without being fairly certain that they will continue to be able to remain employed until retirement age,” adds Nel.

Explains Ewald Kellerman, head: customer interaction, Absa Home Loans: “The sustainability of income to afford a loan for the duration is one of the most important measures that needs to be considered.”

He adds: “This may require the term of the loan to be reduced in accordance with the ability of the customer to generate sustainable income. By limiting the term of the loan to a maximum age, we ensure that the customer does not get into a position where he has a responsibility of instalments without the means to afford them if his/her financial situation changes due to their life stage.”

Point is, if you are approaching the ‘mature’ category, don’t put your home loan application on the backburner even if you have intentions of working past retirement. There is no box to tick for this.

Should you happen to fall into both categories, expect an onerous amount of documentation; you will probably be asked to provide a significantly larger than normal deposit – probably 25% or more – over a reduced term, with possibly higher repayments.

The self-employed factor 

If you fall into this bracket, which ostensibly can mean you freelance, undertake contract work or run your own business, look forward to being put through a series of hoops.

According to Stats SA’s 2014 Survey of Employers and the Self-employed (SESE), around 1.5m people in 2013 were self-employed, the bulk of whom fall into the informal sector. Given that around 52.3% of these non-VAT registered businesses had a monthly turnover of R1 500 or below, it is small wonder that banks cast somewhat of a jaundiced eye on this category of applicant.

However, there are many applicants, VAT payers among them, who fall into a higher income bracket to equal, if not better, their salary slip counterparts. The consolation for these higher earners is that a home loan is possible, albeit with perseverance on the part of the applicant.

Yet complying with all the initial obligations is no guarantee that documentation requirements have been met.

Audited business financials, consolidated management accounts, cash flow statements and business profiles that include items like who the clients, suppliers and competitors are, may appear on the additional requirements list. 

“Assessments of self-employed individuals are by nature more complex,” says Kellerman. “Instead of a steady income, one has to consider the business’ ability to generate sustainable profit and a sufficient cash flow for the benefit of the self-employed individual.

It is advisable that self-employed individuals speak to their business bankers directly who should be in a better position to understand their business and banking relationship, when applying for a new home loan.

The business banker can assist the applicant to supply as clear as possible information at the assessment stage in order to increase their chances of an approval,” he adds.

But are the more entrepreneurial self-employed perceived as a higher risk and do the commercial banks especially focus on the salary slip as a lower risk factor?

“It is indeed true that a salary slip does not guarantee a steady future income, but it does give us a strong indication of the exact amount that the customer earns while he remains employed.

However, in the case of a self-employed applicant, the ability for the business to generate cash is by nature more volatile than a salaried employee. Any changes to the income levels of the company could immediately affect the earnings of the owner.

Even employees of the company in question are paid first before the owner is able to draw a salary,” explains Kellerman.

Says Nel: “One of the realities of the South African labour market is that salaried employees enjoy a certain level of protection under law and it is not easy for employers to reduce their work force in certain parts of the economic or business cycle and expand it again as business requirements may dictate at other times.

”Unionised and non-unionised workers alike usually benefit from annual inflation adjustments to their salaries. In the case of self-employed customers, the failure rate of new ventures is notoriously high.

Many entrepreneurs over-commit themselves when things go well and when the economic cycle deteriorates, some struggle to honour their repayment commitments due to a combination of incomes reducing and expenses increasing, whereas salaried customers typically only face the risk of expenses increasing and to a lesser degree of losing their jobs.”   

This is an excerpt from an article that originally appeared in the 21 may 2015 edition of finweek. Buy and download the magazine here.