Should your current rental match your future bond amount?
Applying for a home loan can leave potential buyers unsure of their own abilities to afford the new home and their credit-worthiness. When a bank assesses your bond application, how big a factor is your current rental/monthly bond repayment? And is it better to rent at a similar cost level to your potential new bond repayment?
The simple answer is yes and no, according to Albertus van Staden, head of credit at FNB Housing Finance.
“Yes, because the applicant then becomes accustomed to their monthly income and expenditure status – for example if there will be additional travel costs – the behavioural aspect thereof,” he says. “And no, when renting in a place where, even if you can afford it, does not always make economical sense. It may be better to rather save the additional amount in a savings account and use it as a deposit. For example, if you plan to buy a property where the estimated bond cost is R8,000, but you currently rent for R6,000, one may rather keep renting at R6,000 and save the R2,000 monthly – thus also making the applicant get accustomed to spending R8,000.”
Van Staden says home ownership costs like rates and taxes and/or levies should be considered too – something often forgotten by prospective buyers. “Rent can vary depending on supply and demand factors, which are not always tied into the value of the property. Rental yields can differ, so rather look at estimated bond cost than purchase price.”
According to Tim Akinnusi, executive head for Home Loan Sales & Client Value Management at Nedbank, the potential client’s current rental will be excluded from the affordability assessment carried out in terms of the home loan application, as long as the property being purchased will be utilised by the client as their primary residence.
Van Staden, however, says the current rental/bond repayment forms part of the customer’s affordability calculation. “This means if it were not to exist in future, then this amount will be deducted from the assessment (and increase disposable income),” he says. “Similarly, if the customer already owns a home and will sell the current one for the new one, we will take the current instalment out of the assessment. Of course, we then deduct the new repayment amount to determine if they will be able to afford the new loan. We also make the loan conditional on the customer settling a previous account first before we will pay out. Paying the rental/bond amount on time each month will contribute to the credit score of the customer, which affects the interest rate, and ultimately, affordability.”
Another way applicants can demonstrate their ability to live within their means is to reduce their necessary expenses, such as rental/bond, transport and food costs. But does a higher disposable income stand them in good stead?
“Downscaling on those expenses shows that customers are able to live within their means,” says van Staden. “But they will have to be accustomed to the downscaling for some time.
“South Africans have a poor reputation for saving and are likely to spend most of their surplus. We tend to match what is available to our lifestyles and not necessarily cut back.
“Not disregarding the fact that this can be done (lowering expenses) – it is an option, although not a very popular one. If one is serious about obtaining your own home, then having these goals in place is a good place to start. If you cannot earn more but do have the ability to cut costs it is also an avenue to explore to increase affordability.”