A Fin24.com user with a young family wants to buy a house, but doesn't know where to start and whether it will be affordable.Mandisa asks:
We have small children and we want to buy a house, but are not sure where to start. We are also concerned about how we will afford it. FNB Home Loans CEO Jan Kleynhans responds:
The National Credit Act (NCA) forbids any credit provider from lending to customers if the loan is unaffordable.
It is therefore critical for you to establish whether you have the means and ability to afford the monthly home loan repayments. This also entails taking your future prospects and obligations into account when considering purchasing property.
The question of affordability considers all aspects of the consumer's financial affairs. These include the stability of income, current loans, expense obligations (including costs incurred to purchase a property such as transfer duty and other property transaction costs) as well as living expenses and lifestyle.
An important consideration, while not a measurable one, is consumers' prospects to service the loan should they run into financial difficulty at a later stage. These considerations often result in the credit provider requiring a deposit against the loan to mitigate any losses that may arise, should the consumer default at any time during the loan contract period.
To determine whether the deposit will be sufficient, one has to consider legal fees, transfer duties and initiation fees associated with a property transaction. The bank's deposit requirement would be over and above that required to pay for the property transaction costs.
For example, the bank may require the buyer to put down a 10% deposit against the purchase price. In addition, you will need to finance the relevant property transaction costs. The transfer duty charged for properties worth more than R500 000 is substantial and unlikely to be financed by the bank.
It is advisable to save for a deposit first to avoid borrowing against the full purchase price, as this will decrease the monthly instalment and the bank will consider the loan in a more favourable light. Thus, the greater the deposit the more likely you will pay a lower interest rate during the contract period of the loan.
When the buyer has saved for the required deposit, one can then calculate the monthly instalment of the home loan and its impact on the overall affordability assessment and household budget.
This would include making allowance for everyday expenses such as insurance, transport costs, groceries and monthly instalments on current debt as well as rates, taxes, amenities and levies on the property intended for purchase. Submitting your loan application
Once the prospective buyer has made an offer on a property and the offer-to-purchase has been signed, the proposed budget and deposit must accompany the loan application.
The credit provider will assess the accuracy of the proposed budget, the deposit, the value of the property in question and the buyer's creditworthiness. As part of the assessment, the credit provider also looks at whether the consumer is likely to meet any reasonable and likely interest rate increases as well as other unforeseen expenses and events that may arise.
Important to note is that the customer must have an acceptable credit record which demonstrates a track record of servicing monthly instalments on current and past loan obligations.
To further decrease monthly commitments, a client should pay off any existing debt before applying for a home loan, as this will improve the ability to service the home loan.
Once the loan application has been approved, the property will be valued to assess whether it will serve as sufficient security for the loan. An attorney will then draw up the bond documents for the consumer to sign, after which the property transfer will be lodged in the Deeds Office. When will a bond application be declined?
A bond application will be declined for two primary reasons: a negative credit record, in which the customer will have to take time to build up a better credit record, and if affordability is in question.
In both of these cases, the customer will either need to save for a larger deposit or consider buying a more affordable property.