The weaker rand, rocketing fuel prices and the steep electricity and municipal tariff increases that are taking effect in cities and towns this month could delay many families’ hopes of becoming homeowners – especially if they start borrowing more to make ends meet.
Botha says banks don’t only consider the applicant’s income and credit record when deciding whether to approve a home loan. They also look closely at their regular monthly household expenses and existing debt repayment commitments.
“South African households have come under increasing pressure this year, especially since the VAT increase in April, and in response it seems that many consumers are now taking on more debt again,” says Rudi Botha, CEO of national bond originator BetterBond.
“We are concerned that this could easily reverse the gains made over the past 10 years as South Africans worked really hard to pay off their debts, and steadily reduced the household debt-to-income ratio from 86.5% in 2008 to the current 72%. Particularly worrying is the rise in rate of unsecured borrowing, which includes personal and micro loans, credit card balances and overdrafts.”
The latest Reserve Bank statistics reveal that unsecured credit extension in the household sector showed year-on-year growth of 5.3% at the end of May. (Compared to 3.1% at the end of December.) And personal and ‘pay-day’ loans, which make up almost 59% of unsecured credit, showed even faster growth of 5.7% at the end of May.
Secured credit extension, which includes home loans, leases and vehicle instalment sales, showed annual growth of 3.9% at the end of May, with household mortgage balances recording year-on-year growth of 3.3%.
Botha says this means that a bigger and bigger percentage of the average consumers’ monthly take-home pay is being used to repay “bad debt” rather than “good debt” such as a home loan. “What is more, this could get worse due to further fuel price hikes and this year’s round of municipal tariff increases, while the stagnant economy is making it difficult for employers to offer wage increases that would improve the situation.
“And prospective buyers whose disposable incomes are diminished by additional debt will find it more difficult over the coming months to qualify for home loans, even though the banks are currently eager to lend to them.”
The reason, he explains, is that the banks don’t only consider the applicant’s income and credit record when deciding whether to approve a home loan, but also look closely at their regular monthly household expenses and existing debt repayment commitments.
“They are obliged to do this, in terms of the National Credit Act, to ensure that borrowers really will be able to afford their monthly bond instalments without getting into financial trouble. But prospective buyers should actually be confident of this themselves before applying for a bond, and that is one of many reasons to consult a reputable bond originator should be one of the first steps in the home-buying process,” says Botha.
“Experts know exactly what the banks require and can suggest ways for borrowers to improve their financial position and credit profile before applying for a bond. In addition, they can obtain bond prequalification for buyers who are ready to enter the market so that they have a clear idea of what they can afford and can concentrate on homes within their price range.”
Then once clients are ready to buy, bond originators can submit their application to multiple lenders and negotiate the best terms and interest rate. This can make a significant difference to the eventual cost of their property.