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Why are 60% of first-time applicants rejected?

Domito Developments - Leopard (5 of 120) - CopyWhile the percentage of first-time buyers among home loan applicants rose to 47% in the 12 months to end-January 2017 – its highest level in two years – only 39% of first-time buyers received bonds.

This is according to BetterLife Home Loans’ CEO, Shaun Rademeyer, who said this indicated renewed confidence in property among younger buyers, especially, and that it was positive for the real estate market as a whole because it is these buyers who provide the stimulus for expansion and price growth in the future, as they move on to their second and third homes.

There is no doubt about the demand for homes and mortgage finance, but 61% of applications from these potential buyers points to consumers’ inability to reduce the bank’s risk – whether by not having enough room in their budget for interest rate hikes, applying for too high a bond, or simply not having saved up for a deposit and the associated transfer and attorney fees.

Rademeyer points out that the percentage of bonds being granted to first-time buyers rose by 1%, compared to the 12 months prior, attributing this to households’ improving ability to manage their debt.


Where are all the buyers?


“It has no doubt been bolstered by the improving household debt to disposable income ratio, which has steadily dropped from almost 88% during the 2008/09 recession to about 74% currently due to household incomes rising faster than household borrowings (credit extension),” he said. “It has also helped that there have been no interest rate increases since last March. This has given many households time to genuinely improve their financial position by paying off existing debt and freeing up discretionary income, which then makes it easier to qualify for a bond.

“At the same time, price growth has been relatively slow, which has put a lid on the size of bonds required by prospective buyers. Our statistics show a 12-month increase of just 5,4% [price growth] in the first-time buyers’ market, or less than the rate of inflation.”

If interest rates rate remain where they are in the short to medium term, house price inflation continues to decelerate, and if households have improved their debt situation, why are so many first-time applicants being rejected?


Average deposit for first-time buyers up 18% year-on-year


Rademeyer said lenders also required much smaller deposits in the lower home price categories than in the upper brackets.

“Our statistics show that the average deposit being paid by first-time buyers now is just 12,2% of the purchase price, compared to the overall market average of 22,5%,” said Rademeyer. “They also show that there has been a 4,4% increase in the past 12 months in the number of bonds being granted to buyers with a deposit of 10% or less.”

While each application is unique, based on the above positives, one plausible explanation could be that first-time buyers are attempting to buy more house than they can reasonably afford. By doing online affordability assessments, first-time purchasers may be attempting to qualify for their maximum preapproval amount. It remains vital for potential buyers to educate themselves on all facets of home buying and ownership before house hunting and, especially, before signing an offer to purchase.

david.steynberg@gmail.com

David A Steynberg, managing editor and director of HomeTimes, has more than 10 years of experience as both a journalist and editor, having headed up Business Day’s HomeFront supplement, SAPOA’s range of four printed titles, digimags Asset in Africa and the South African Planning Institute’s official title, Planning Africa, as well as B2B titles, Building Africa and Water, Sewage & Effluent magazines. He began his career at Farmer’s Weekly magazine before moving on to People Magazine where he was awarded two Excellence Awards for Best Real Life feature as well as Writer of the Year runner-up. He is also a past fellow of the International Women’s Media Foundation.

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