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Why the Banks aren’t granting Bonds

You may be one of the many South African’s looking to buy and own your first home. Taking the plunge and moving from renting to buying is both an exciting and daunting task, but aspirant home-owners in today’s economic climate are faced with the harsh realities of impaired credit records and personal debt.

A rise in living costs and strained economic conditions have resulted in fewer and fewer bonds being granted by the banks; this due to many of the applicants either unable to afford the bond repayments and other costs involved in home buying, or having an impaired credit record and a history of poor credit performance. Recent figures released by ooba indicate that almost half of employed bond applicants are declined on a monthly basis. This leaves the vast majority of hopeful home-owners with no other option but to continue to rent – essentially paying off someone else’s bond rather than their own.

Financial institutions/banks have set in place strict lending criteria to prevent individuals from defaulting and falling into debt. The banks require a deposit, proof that the buyer is able to afford the bond instalments and all other future costs concerning the property, and a positive financial track record. Banks will not grant a home loan if the applicant has a history of poor credit, which is an unsurprisingly high amount of South African consumers considering today’s tough financial climate.

Another possible pitfall in securing a home loan is that consumers are finding that the banks’ require a deposit that is higher than what they can afford. 100% loans are few and far between, and applicants are struggling to come up with a significant enough deposit to either assist in their bond application or meet the bank’s deposit requirement in order to go ahead with the approval of the loan. A rise in living costs and interest rates has forced South Africans to be more conscious of their income vs expenses.

The banks have not necessarily become stricter – the consumers applying for home loans appear to no longer be able to meet the affordability assessment employed under the National Credit Act (NCA).

The National Credit Act requires all credit providers to conduct a credit risk evaluation on the individual seeking to enter into a credit agreement. Credit providers should ensure that applicants read through and fully understand the credit agreements, as well as the risks and costs involved and the applicant’s repayment obligations going forward. The credit providers assess the applicant’s credit/financial history recorded by a registered credit bureaux and whether the applicant has the financial means to service their loan repayments.

This takes into account;

  • Income
  • Expenses
  • Past credit repayments
  • Debt and debt repayments
  • The reason for the credit transaction

As well as other personal information such as the applicant’s age, marital status, residence and employment. Quite simply a bank will review the consumer’s income earned on a monthly basis less their expenses. The amount left over is seen as what’s available to pay the bond. They are then able to make an informed decision as to whether the credit should be granted to the applicant.

Aspirant home-owners should work towards establishing a good credit rating as visible proof to the bank that he/she is able to pay the bond repayments in full and on time every month. Their performance over their lease period can be used to convince a bank of their creditworthiness and affordability, in essence strengthening their credit record.

Committing to repay debt in regular instalments, prioritising credit repayments and monthly essentials, and consistent and accurate budgeting are some positive examples that demonstrate that the applicant is dependable and disciplined in their payment habits.

It appears that bond applicants will continue to find it difficult to attain home loans over the next year due to personal financial constraints and the economic climate as a whole.

Consistent and conscious positive performance in credit repayment and spending habits will go a long way in reassuring the credit provider of an applicant’s repayment behaviour.