Battle for the bond – why self-employed applicants struggle
15%. This is the minimum deposit required by Absa* when a self-employed individual applies for a bond from the bank. And if you are deemed to be risky, the equity required may increase further.
Fewer South Africans are self-employed today compared to 2008 when the global credit crunch bit. According to Absa’s Small to Medium Enterprises index, declines started in the third quarter of 2013 and have not slowed since. At the start of this year, the number was pegged at 1,2m adults – a year-on-year decline of 6.8%.
But for those who have been successfully trading for at least two years, they have the option to apply for bond finance – two consecutive years of bank statements and tax returns gives financial institutions a clearer picture of your affordability levels and income/expenditure patterns.
Many self-employed adults who have applied for bond finance will attest to the fact that the process is more complicated than had they been permanently employed, but Absa’s relationship manager, Ewald Kellerman, says a salary slip does not guarantee a steady future income.
“It does, however, give the bank a strong indication of the exact amount that the customer earns while he/she remains employed,” he says, noting that self-employed applicants’ ability to generate cash is more volatile. “Any changes to the income levels of the company could immediately affect the earnings of the owner. Even employees of the company in question are paid first before the owner is able to draw a salary.”
Tommy Nel, who heads up credit at FNB Home Loans, recognises that banks are not doing enough to assist self-employed workers to obtain bond finance, but adds that his department is working on a solution.
The fact remains that banking legislation and credit application requirements have changed in South Africa, and will continue to evolve as the economic climate remains uncertain. This is according to Gary Sacks, GM at HomeBid. “For these reasons, many business owners and sole proprietors are often reluctant and apprehensive when approaching a bank for a mortgage bond,” he says. “If we wade through all the information and however complicated it may seem, the bottom line is the fundamentals still remain the same: is your financial information up to date and has it been accurately recorded? From the information that you have provided the bank, will you be in a position to afford and service the loan for which you are applying?”
The responsibility lies with the self-employed applicant to provide the bank with all the information required and in the correct format. “Self-employed applicants are quick to blame the bank for the delays and credit declines, and more often than not use the same excuse that they have been a client of the bank for so many years,” Sacks says. “What they fail to realise or choose to ignore is that the whole banking industry has changed.”
The best advice for you to ensure you not only get a loan approval but also the best possible deal on offer is to comply with the banks requirements and provide them with all the information they need to perform a credit assessment on you.
* Nedbank and Standard Bank failed to answer.
What information is the bank looking for?
- Updated and signed audited financial statements. If the financial year-end is more than six months prior to applying for the loan then provide supporting and signed management accounts
- A signed auditor’s letter confirming your salary, dividends and bonuses where applicable
- Six months company bank statements
- Six months personal bank statements
- Personal statement of assets and liabilities
- Statement of income and expenditure
- If requested have a copy of your tax returns handy