Bond as salary percentage
A Fin24 reader asks:
How much in percentage terms should one pay towards a home
loan (bond) and car repayments, relative to one's basic income?
Pat Lamont, general manager of Nedbank Home Loans,
Each application is assessed according to the individual
risk profile. In general, though, we continue to believe that putting down a
significant deposit is good practice for both the client and the bank.
Therefore, we will continue to encourage clients to do this
to get a better interest rate. We encourage clients to base their affordability
decision on the prospects of increased interest rates to absorb any economic
As a general rule, the monthly bond repayment amount may not
exceed the cost to the client's gross monthly income of 30% for home loans and
15% for vehicle finance.
SA Bond Originators believes this means that with a salary
of R20 000 per month, the prospective home buyer can use a maximum monthly sum
of about R6 000 to pay off a home loan. This amount can be increased by
applying jointly with a spouse, friend or family member.
The current prime interest rate plays a big role. The lower
the rates are, the bigger the bond amount will be. Using the above-mentioned
salary example, if interest rates were at 10% the client would qualify for a
bond of about R600 000; if rates were at 15.5%, the client would qualify for a
bond of about R430 000.
Jan Kleynhans, CEO of FNB Home Loans, responds:
FNB considers the customer's total commitment to loan
repayments before approving any home loan. Repayments of all loans should not
exceed 30% of a customer's salary. Repayments on home loans, vehicle finance,
personal and other loans such as study loans are also considered to determine
It is also not wise to buy anything on credit when your monthly budget is already stretched to the limit.
You should pay what your monthly cash flow allows you to afford. You cannot make general rules of allocation but perhaps rather guide with best practice. The first step is to measure your past 6 months cash flow - understand the surplus each month and add back your current rent / bond installment. Using 70% of this amount toward your new bond will provide a useful safety net against interest rate increases and unexpected increases in life style costs. Remember though, that a separate emergency savings account should be maintained to cater for unplanned for events.
Ok, so lets read between the lines... A significant deposit = lower the banks risk (closing the stable door after the horse has bolted and devaluing existing property as few have those resources)
Current prime interest = how does a fluctuating mortgage rate sit with or
a) the credit act
b) affect inflation as long as the lender is not borrowing to consume? (that horse again)
Why do we not have tax relief on property purchase, as in stimulating job creation by increasing property demand?
Why do we not have mortgages pegged against a gilt issue (20 year Bond)
The problem with buying a home at the moment is that bond rates are exceptionally low. And people will purchase a home and get the maximum bond. But interest rates WILL go up, no question about it, and then people will land up not being able to make the repayments, and then end up losing their home. When we purchased our home, we purchased a home with a value of 60% of what the bank was prepared to lend us, and when interest rates went up to 24%, we still struggled. Imagine if we had purchased to the value the bank said we could afford! You have to be honest with yourself about what you can afford because if you are not, YOU will lose everything. Use Excel (or one of the bond calculators) to calculate what your repayment will be if interest rates go up 5%, and make sure you can still afford the repayments.
The repayments should not exceed 30% of income, totally agree with that but all other debt should be considered on assessing the client and their ability to repay the bond. The banks should also increase the interest paid on investments to be closer to the prime rate as the current rates does not encourage people to invest and save. These current rates that the banks offer is below inflation so in my view, the value of the money in the bank is decreasing by the day. It is cheaper to keep your funds under your mattress as the banks levy all types of charges that does not always make sense.