According to Absa only 38% of applicants qualify for a home loan through the bank, and 22% of those are declined after affordability assessments are conducted. Absa recently released its Homeowner Insights, giving consumers a snapshot of the home loans market but the information contained therein is not all positive.
Affordability remains the foremost consideration for anyone contemplating buying a home in South Africa.
“The findings of our first Homeowner Insights has given us a far better understanding into the various decisions consumers take along the initial stages of their homeowner journey. The findings of this, and each subsequent report, will play a key role as we continue to guide our customer’s home - shaping future propositions and communications based on the insights we gain,” said Carel Grönum, managing executive of Absa Home Loans.
The affordability problem
When deciding to buy a home, prospective buyers have to consider both the cost of the home, and how long they are going to commit to the repayments. Moreover, they also have to think about the risks and their ability to service the home loan consistently over a long period of time.
However, affordability is still poorly understood.
“It leads to anxiety as well as inefficiency in the pre-buying and property searching phases and potentially places the customer’s financial wellbeing at risk,” said Grönum.
Grönum said that aspiring home owners regularly apply for a home loan without fully understanding or disclosing their current financial commitments and without grasping the full impact that the monthly instalments could potentially have on their financial welfare.
“Affordability is a complex subject that poses significant challenges to the pre-buying and searching phases of the homeowner journey,” said Grönum.
False confidence?
The Homeowner Insights found that the 87% of respondents were confident about their ability to afford their newly approved home loan at the time of searching for a property.
However, only 37% of applicants received approval for their loan.
“While credit records and conduct of accounts play a key role when assessing home loan applications, affordability accounts for a large portion (22%) of customers’ home loan applications being declined,” said Absa.
Even when customers have good credit records, and finances are healthy, they simply could not afford the monthly instalment based on the bank’s affordability assessment.
“The biggest challenge with the affordability assessment does not lie with the assessment process, but rather with the customer’s interpretation and understanding of their own personal financial situation,” said Grönum.
Ewald Kellerman, head of customer interaction at Absa Home Loans said that consumer education could resolve the disconnect between the bank and customers’ understanding of their financial situation.
Pre-approvals
While pre-approvals for home loans may in fact be a solution to this problem there are some banks that are hesitant to award this. Kellerman said that pre-approved home loan certificates were quite expensive to produce with a great deal of manual intervention, and very few certificates translated into actual applications. This resulted in many of the banks not offering pre-approval loans.
However, Kellerman said that Absa has tried to combat this problem with comprehensive home loan calculators.
“Using tools such as online calculators can assist home buyers to establish what they can afford, what the upfront costs such as registration, transfer and initiation fees are, and has the potential of improving the effectiveness of the entire buying and selling process,” said Kellerman.
However, Kellerman admitted that “even the best online calculators are only as effective as the quality of information used to complete the form.”
He said that when you are in doubt about the use of these calculators, bank’s Home Loan consultants, mortgage originators and even estate agents have good experience in understanding the rules of affordability assessments.
Tax band on transfer duties
As was announced in the 2015 Budget, tabled in Parliament on 25 February 2015, the rates and brackets for transfer duty on the sale of property on or after 1 March 2015 were adjusted to provide relief to low- and middle-income households. Transfer duties and other associated costs could also prevent first time home owners from buying property.
But there are ways to avoid some of these costs. Kellerman explained that the new rates eliminated transfer duty on all property acquired below a value of R750 000 compared with a threshold of R600 000 since 2011/12.
Rawson Properties has a calculator on estimated transfer duty costs, depending on your bond as well as the cost of the property, click here.
For other reasons why you could be rejected for credit, click here.