Mention ‘bond affordability calculator’ and most people will automatically think of a bank or home loan provider. Today, bond affordability calculators are an important part of many financial institutions’ repertoire as they are often – and should be – the first port of call for aspirant property buyers. Importantly, according to Timothy Akinnusi, Executive Head of Sales and Client Value Management at Nedbank, such calculators also often act as the launch pad for the property purchase process.
Simply put, bond affordability calculators typically comprise a set of “windows” in which information such as the property price, gross and/or net monthly income, the duration of the loan, deposit, monthly expenses and interest rate can be inserted. Of course there are variations on the theme but this is the basic premise behind the concept. Generally speaking, once all these variables are factored in, the calculator will provide a loan amount and the required monthly repayment amount.
Manage your expectations
Notes Akinnusi. “Affordability calculators are increasingly being used by those interested in purchasing property as they help people to manage their expectations. Through the calculations provided, prospective clients can ascertain straight off the bat whether or not they have a good chance of qualifying for a loan amount and how much they would need to pay back every month over a certain period of time.”
Akinnusi adds that not only do these calculators provide the basis for affordability, they also serve to provide a fairly good idea of how much interest will be charged over the term of the home loan and the changes in the interest charged when there are future changes to the prime lending rate. All a prospective home buyer need do is adjust the interest rate and keep all other variables constant.
Calculating future payments isn’t all just about the interest rate though. As such, other factors can be integrated depending on the financial provider. For example, Nedbank now offers calculators that take into consideration factors such as lump sum payments, monthly repayment increases, shorter repayment periods, and annual percentage increases on repayments.
When using affordability calculators it’s also important to remember that the quality of the output from the calculators is only as good as the information they are given. If for example monthly expenses such as home insurance and rates and taxes are left out of the equation, the comprehensive cost of the home would not be accurately reflected by the calculator.
Adds Akinnusi: “Of course nobody knows for certain what their financial situation will be in the future or what the interest rate will be – especially in the current uncertain economic climate. As such, we advise erring on the conservative side and building in as much as a ‘buffer’ as possible by not taking the maximum amount allowed from an affordability perspective. This will ensure that any future bond repayment increases can be comfortably absorbed.”
Staying on the conservative tack, Akinnusi explains that it’s also best not to structure a home loan according to the maximum duration of 30 years as doing so doesn’t really leave any scope for restructuring the agreement if necessary. Likewise he advises against taking out a personal loan for a deposit as this effectively translates into a short-term loan, which attracts a higher interest charge being used to fund a long-term loan commitment. In doing so, he says, consumers can end up paying much more interest than they should on a home loan.