Know Your Affordability
03 November 2017
It’s good to know exactly how much you earn and spend in a month, right? This especially comes in handy when you’re looking to buy property or even just maintain a good credit record.
Samistha Harcharan, a member of the Acquisitions Team in Home Loans, took some time to answer a few of those burning questions that’ll help you better manager your affordability, and increase your chances of getting your home loan application approved.
First things first, what does affordability mean? It refers to the money you have left after subtracting all your expenses from your income.
Now, before you further assess your financial situation, Harcharan advises that you check whether you are credit worthy. “It’s important that you obtain your annual free credit profile check. Sometimes you think you’re fine because you’ve never missed payments, but in fact there are many factors that are taken into consideration when calculating your credit score.”
Pay attention to the following factors to ensure that your credit profile remains intact.
- Budget properly.
- Lighten your financial load by reducing debts as much as possible.
- Maintain a good repayment to income rate of around 30%. This means that only 30% of your income goes toward paying debts and other expenses. This means that if you earn R10 000, try to budget for a house that will be at most 30% of your income i.e. R3 000. This is to prevent you from getting into a situation where you have more debt than you can repay. Absa believes in living financially stable lives, so that you’re able to take care of yourself and your family. If you decide to spend R5 000 i.e. 50% of income, you will only have R5 000 left to cater for Necessary Living Expenses such as food, transport and medical expenses.
Then you should also assess the following factors:
- The Interest rate: This, along with the country’s economic climate, directly affects bond repayments. Your repayments may increase if the interest rate goes up. The home loan rate is normally linked to the prime rate, whereby a concession is added to obtain the final interest rate which the customer pays. The concession is determined by the risk profile of a customer. Higher risk customers (more likely to default) will be charged higher rates, versus lower risk customers (less likely to default) who will obtain lower rates. Look into fixed rates, which enables you to budget effectively and manage your monthly cash flow better.
- Extra costs: When drawing up your home loan repayment budget, remember that you will pay extra costs, including such items as levies, rates and taxes, insurance, and monthly service fees.
- Property risk: Make sure the property you’re looking to buy is in a good area that will let it grow in value. A home loan is a secured product, which means your interest rate is normally much lower than on other lending products – because should you default on the loan, the bank is able to assist the customer in the sale of the property to reduce or fully repay the debt.
Now that you know the factors that matter, what does the bank take into consideration? According to Harcharan, the main aspect is the customer’s risk profile, in addition to affordability.
“You could be a really good and credit worthy customer, but if you don’t have the affordability, the bank will be unable to lend you money. There isn’t really a norm when it comes to this because it varies considerably from one person to another.”
When calculating your affordability, Harcharan emphasised that the better your risk profile, the better your chances of being granted a higher loan amount. This comes down to your credit profile from internal bank data and external bureau information that assists the bank in assessing the probability of you repaying your loan. Absa will always have more information on their existing customers, as they can monitor their internal payment behaviour and could grant improved offers. “We always encourage customers to put down deposits, because it means that customers are invested in their loan, it means that they have to borrow less money from the bank and have a lower repayment amount as a result.”
The bank also assists in granting home loans for low-cost housing. “Affordable Housing” is one of our major strategy points. So much so, that we have separate plans and loan options for this housing segment. Customers can also take into account that the bank is not as strict on low cost housing, but will still not lend recklessly.”
Use these tips to help you get your finances in shape before applying for a home loan:
- Pay off or pay down your personal loans and credit card debt
- Make sure you know your credit record is in good shape
- Plan ahead. It improves your credit record if you’re able to show a healthy track record of paying accounts off, like store cards, or a personal loan.
- If you have other income sources like from a business, make sure all of your documents are in place, so that the bank can consider your full income in calculating your affordability.
- If you have investment properties, make sure that your leases are up to date, with at least 6 months to go on the lease. Keep in mind, the bank will only count 60% – 80% of this income when assessing your affordability
Bear in mind that it might be a good idea to explore the option of a joint-application, as that should increase household income if both you and your partner are working and earning an income. Also, if additional support would help you, you can consider the Family Springboard Home Loan. This gives you the option of getting a family member or friend to stand surety for a portion of your home loan.
Affordability is extremely important and can be described as a mini-income statement. This is why it is beneficial that your total income is higher than your daily living expenses and monthly debt. Living expenses can include items such as food, rent, transportation, medical aid and communication devices, and your monthly debt repayments include items such as loans, vehicle finance, personal loans, furniture finance and home loans.
Interested to learn more about relieving your debt and maintaining a healthy credit record? Take a look at a few of our other blog posts on this topic.
- For the Record: Everything You Should Know About Your Credit Record
- What to do When You Fall Behind on Your Bond Repayments
- The Debt Counselling Journey
- Shedding Light on Debt Counselling’s Lesser-known Predecessor, Forbearance
- Aftermath: Picking up the Pieces of Bad Debt
Now that you know the basics of your affordability, here’s a video that you can watch, should you require any additional information:
Disclaimer: The advice contained on this blog is for general purposes only and does not take into account individual circumstances, objectives or financial needs. Accordingly, readers are advised to seek appropriate advice from licensed professionals prior to making any investment, or taking up a financial product or service.