No Reprieve for Bond Applicants

Private Property South Africa
Antoinette McDonald & Angelique Arde

Are banks loosening up after a series of interest rate cuts? This week we asked property specialists to respond to a question from one of our readers, who asked: “The banks weren’t granting bonds to people six months ago based on certain qualifying criteria related to their ability to pay their bonds. Now that the interest rates are down 4.5%, are those same people now able to get the bonds they were denied? In other words, if I was declined an R800k bond six months ago, would I be able to get that same bond now, given that the repayments are so much lower?”

We spoke to bond originator Gary Peterson of The Bond Man. He says that regardless of the interest rates, banks certainly aren’t dishing out home loans like they used to.

“A year ago, the base home loan rate was 15, 5%. Now it’s 11%. A buyer with surplus disposable income (after tax, salary deductions and personal monthly expenses) of R10 000 a month would have qualified for a bond of R770 000 in June 2008. Theoretically, the 4, 5% plunge in interest rates should mean that the same person would qualify for a bond of R1 million today, but my experience is that some banks remain reluctant to recognise that consumers with a steady income are considerably better off now than they were a year ago.”

The Bond Man warns buyers that in the current lending environment, factors that were considered important in the past, like one’s net asset worth and personal relationship with a particular bank, don’t count for much these days.

“Mortgage lending rests entirely on affordability and on the applicant’s ability to prove their income to the banks’ satisfaction.”

Peterson says that this is pretty straightforward for salaried applicants, who only need to produce a recent payslip. But, self-employed applicants are generally left out in the cold.

“The likes of freelancers have to jump through all sorts of hoops in the bond application process. In some cases these applicants have to provide audited financial statements or tax returns for the past three years.”

Peterson believes that now more than ever, it pays to have an experienced mortgage originator on your side to guide your application through the “minefield of obstacles that banks have created”.

Kevin Penwarden, the CEO of SA Home Loans, believes that looking at interest rates alone is too one-dimensional.

“No bank makes a credit decision based on interest rates only. Since the introduction of the National Credit Act there’s a much more holistic approach in assessing a person’s ability to repay a loan. Our overview of a client has to be very in-depth. We look at income and expenditure and assess whether those gaps are sufficient to sustain the requested loan. Prime might be down today and up again in two years, so it’s important to assess a client’s ability to withstand volatility in the market.

“I think that the biggest problem is that consumers have grown accustomed to living in debt. Credit was dished out way too easily in the past and that’s put a lot of people into situations that they actually cannot afford to be in.”

Penwarden says that there has definitely been an overall slump in the number of applications approved over the past year.

“Ask any bank and you’ll see that they’ve all had a significant increase in the number of declined applications. This is for several reasons. The impact of high interest rates had an effect on a client’s affordability. Clients are generally over-indebted and have built up debt all over the place. In addition, there’s limited liquidity within the banks – they just don’t have the same money that they had to loan in the past. This is due to the global economic crisis. So it’s really not all about credit worthiness at the end of the day.”

But the SA Home Loans CEO predicts that things will pick up within the next 9-12 months.

“I’m really optimist and think that we can expect things to look up in the first quarter of 2010. At the moment we’re officially in recession and commerce will be affected. I’m concerned about the growing unemployment rate, especially considering that now many more people just won’t be able to service their debt.”

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