Mortgage loan applications

by Dale Petersen and studio@brandesign.co.za | April 19, 2022

In today’s banking world, there are largely two forms of debt: secured and unsecured. Secured debt refers to debt that is backed by an asset, like a house or a car (or even shares or cash investments). Unsecured debt is not linked to nor protected by an asset. Lenders, like the bank, view unsecured debt as riskier and therefore apply stricter terms and conditions to these loans, usually in the form of higher interest rates.

Your ability to attain credit, whether secured or unsecured is affected by your credit rating or credit worthiness. The better your rating, the more likely the bank is to extend credit to you and the more likely that you will receive favourable terms. Your rating is based on how much debt you have and how well you service (repay) this debt.

High levels of unsecured debt (credit card or personal loans) will affect your mortgage loan application. Your ability to service your monthly bond instalment is weakened by your obligation to service your credit card, personal loan or even clothing accounts. The bank takes all debt into consideration when you apply for any loan.

Mortgage loan considerations

With many people now entering the property market, either as first-time homeowners or as investment property buyers. It is important to understand the factors that banks use to evaluate your application. When applying for a mortgage the banks take your total earnings and your overall credit exposure (which encompasses all debt linked to your name) into consideration. This is referred to as your debt-to-income ratio.

The following key factors are important to consider:

Affordability

The bank will apply an affordability calculation as part of your application. This process considers all your income sources (salary, investment income) and all of your debt obligations (credit card, monthly household costs, lease agreements and more). Affordability is also governed by the maximum percentage allowable in terms of the National Credit Act. Currently this is set at a maximum of 30% of your gross income.

Deposit

Your deposit plays a crucial role, in several ways, when purchasing property. It not only decreases your monthly instalment but also increases your negotiating power for a better interest rate. Your negotiations are enhanced as a large deposit mitigates the bank’s risk.

Property usage

For individuals, the most common uses for property are 1) as a primary residence or 2) as an investment, typically for rental income purposes.

  • Primary residence: the house that you and your family intend to reside in. First-time buyers are able to secure 100% funding from the bank. Interest rates are more favourable as the risk of default decreases on a primary residence.
  • Investment property: a secondary house used for rental purposes. Often a deposit of 10% or 20% is required but this could increase depending on how many properties you may add as you build your property portfolio. The rate applied to these deals are generally not as favourable as that of primary residence rates.
As primary residences and investment properties carry different risks, the bank will apply different risk models in terms of the evaluation. This is critical to understand when dipping your feet into the investment property space. Also, the fact that potential rental income may cover the total amount, or a large portion, of the bond instalment amount does not necessarily mean that the bank will approve the loan. The banks want comfort in knowing that you, as their client, can service the debt without relying on the tenant to do so.

Interest rate

Just a few short years ago, when the prime lending rate was 10.5%, an individual’s purchasing level was less than it currently is. This should not be a reason to overextend yourself as rates will increase and that could affect your ability to service your debt. As mentioned above, the rate applied to your deal is largely determined by the deposit you provide as well as your credit history.

Fees

The fees associated with a property purchase are:
  • Initiation fees: this is the fee charge by the bank
  • Valuation fee: where a desktop property valuation cannot be done, physical property valuation fees are charged
  • Bond registration fee: charged by the attorneys appointed by the bank to register the bond in your name
  • Transfer fee: the fee charged by the attorneys appointed by the seller to transfer the property from their name to yours. Historically, these fees were not capitalised and had to be paid as a lump sum amount by the purchaser, but banks are now capitalising these costs for first time homeowners
We assist our wau family-office clients with commercial and investment property transactions. Contact Dale Petersen on 021 819 7802 or 066 165 9019 to find out more about our family-office offering.

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