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www.thevillagenews.co.za
3 February 2021
MY HOME
Are you ready to be a homeowner? By Stephen de Stadler Managing Director Fine & Country Hermanus, Arabella and Kleinmond
T
he nationwide trend for the establishment of security estates came slower to the Western Cape than it did to Gauteng. Hermanus in particular now has a variety of estates to choose from, catering for the discerning homeowner irrespective of their available budget. The reduction in the interest rates has also made first-time home buying more affordable, and dare I say it, preferable to renting. For these new homeowners in particular, it is important to recognise the responsibility that comes with owning a home, starting with their ability to raise the necessary finance to buy that home. Since the National Credit Act came into effect, prospective homebuyers have been required to have their financial affairs in order before they apply for a bond. While banks have become slightly less stringent since the act's inception, financial institutions are likely to tighten up their lending criteria in 2021 and beyond, and bond applicants will be put through their financial paces before being approved for a home loan.
The repo rate has come down, leading to a reduction in the prime overdraft rates, but this has been caused by a faltering economy. The level of unemployment is up, and in these relatively uncertain times the banks will become more careful in the application of their lending models. If you have made the New Year’s resolution to buy a home during 2021, you will need to ensure that you have assessed your financial situation and answered a few pertinent questions before approaching your bank for bond approval. The banks will require a good credit score, evidence of stable employment, an appropriate level of disposal income, and probably some level of deposit. Having a favourable credit score and clean credit record is a valuable asset when applying for a home loan. Each year you can obtain a free credit report from the credit bureaus to assess your finance position. It is advisable to know your credit score and check your credit record for any inaccuracies. Any missed or slow payments will have a negative impact on your credit score. However, it is also important to be mindful of the less obvious credit infractions such as opening too many accounts, having numerous credit enquiries against your name, co-signing for a third party or only paying the minimum
required payment in respect of any outstanding loan. These actions may impair your history and could scare off potential lenders. By the same token, having an enviable credit record is often better than having no credit score at all. I have always advised people to have a credit card with a manageable limit and to pay off the full balance monthly. These positive credit actions will help to keep your credit score as positive as possible. As a potential homebuyer, the maximum bond amount that you qualify for is based on your annual income, so be sure to include any bonuses or annual investment returns when making this calculation. Your annual tax return documentation may assist in proving your actual yearly income. After determining your income, the banks will also concern themselves with your actual disposable income. If possible, get rid of as much short-term debt as possible before applying for a home loan. Banks are used to seeing medium-term debt on most people’s personal balance sheets, vehicle finance being a common occurrence, but too many clothing accounts could be seen as negative. Longerand medium-term debt items are normally supported by real assets, whereas clothing once purchased does not have a ready resale value.
The affordability question will determine the final amount that a bank is prepared to advance. Remember that the full initial cost of any home must also include transfer fees, attorney fees and bond costs. Ideally, your monthly home loan payment, including the capital and interest repayments, the administrative and insurance fees, should not be more than 30% of your monthly income before tax. This rule of thumb obviously assumes that your short- and medium-term debt is at acceptable levels as well. Owning a home is a long-term investment and thus the decision to acquire a home needs to be taken in the context of that term. It is likely that real capital growth will ensure that the value of the home increases over time, however this should never be relied upon as the basis for ultimate repayment of the loan. The homeowner should ensure that they will be economically viable for the period over which they expect to repay their home. Purchase a property that you can comfortably afford, ensure you are financially prepared, and allow the specialists such as the mortgage originators to assist you in the bond application process. The views expressed above are those of the writer in his personal capacity and may not necessarily reflect the views of Fine & Country as a national and international brand.
