Deposits: The Devil Is In The Details

While the finger of blame may point towards the banks when it comes to the difficulty of financing a property, the bottom line is that if you want to apply for a home loan to purchase a property, you will need to pay a deposit. Deposits, along with transfer and registration costs, are often excluded from the financial equation when buyers are considering affordability, says Deon Lessing, marketing director of Betterbond, South Africa’s largest mortgage originator. He explains that the loan to value (LTV) ratio, which represents the part of home you are financing against the total value of the property, forms an integral part of your mortgage application as it affects your home loan approval status and the interest rate you qualify for. “If the amount you apply for falls outside the set lending criteria of a bank or lender, your mortgage application will be denied as you will be regarded as too great a risk. Seeing that these credit policies differ from bank to bank and depending on the type of property purchased, it is worth your while to consult your bond originator on the matter,” says Lessing. Previously South African banks awarded up to 108% LTV in the past. “This percentage allowed for the purchase price of the property as well as an additional 8% which could have been used to pay additional costs incurred such as bond registration costs,” says Lessing. This is not the case today. “At present, a deposit may be necessary to cover the difference between the amount for which the home loan was granted and the purchase price / value of the property. However, in the affordable housing segment of the market, guarantees are the order of the day. More often than not, Lessing says, buyers think that they will be able to sell another asset or generate the deposit amount from another source such as a policy etc. But when the time comes for the deposit to be paid, the asset they sold never generated enough to cover the deposit, or the policy couldn’t be cashed out. “This is when sales fall through, which is very frustrating for everyone concerned.” Therefore, Lessing strongly advises that it is essential for buyers to have cash available for the deposit before they make an offer to purchase a property. Buyers can also calculate all the necessary costs and risks involved with a property purchase. Calculating your LTVCalculating your loan to value is an easy task. Simply divide the total amount you wish to borrow by the value of your home. “The higher your LTV, the less “home” you own and the greater of risk the banks will consider you to be,” notes Lessing. That said, your mortgage lender may require you to buy Private Mortgage Insurance to manage the risk. Managing the RiskLessing advises buyers to consult a bond originator to determine their risk. “A good bond originator will be able to provide you with an estimate of the property you qualify for. Your bond originator will also be able to advise you on the deposit required as well as the different types of applications and documentation needed by each bank,” Lessing says. The banks rely on various documents to assess the affordability of home loan applicants. “These documents are scrutinized against credit bureau data available, your income and expenses stated and the National Credit Act,” notes Lessing. Other main factors banks take into consideration when calculating your overall risk profile include the general affordability of the home loan, disposable income (funds available after all expenses have been deducted from the applicant’s salary) and deposit requirements. “No more than 30% of the applicant’s gross income is used to calculate the maximum home loan amount. An applicant’s disposable income should furthermore exceed the monthly home loan repayment amount,” says Lessing, adding that the time to buy property is now, seeing that good value-for-money investment opportunities are currently available. “At the end of the day,” he says, “buyers need to ensure that they have a decent credit record. But the fact that banks are now requiring smaller deposits is a good trend and is sure to further stimulate the upward swing of the local property market.”