When buying a property, one of the most important factors is the money involved. And probably one of the most important money factors is knowing how much you can afford. In this article, we will look at your affordability when buying a property, as well as how the banks look at you.
Buy within your means
Before we even look at affordability and qualifying for a loan, an important thing to keep in mind through the entire buying process, is to buy within your means. When looking for the perfect property, it is easy to get swept away by big dreams and this tempts us to buy beyond what we can afford, quickly turning your dream property into your monthly nightmare.
Carefully build a budget that takes your (and your family’s) monthly needs into consideration, ensuring you leave enough breathing room in your budget for other expenses and comfortable living. Always keep in mind there are plenty of other expenses than just a bond repayment associated with buying a property, but we will cover these in more detail in one of the coming Property Buying Tips.
Don’t be scared to say no to a property that is too expensive, or to wait for another opportunity. Buying a property will probably be your biggest purchase in your lifetime, but not necessarily your only purchase. There will always be room to grow and upgrade in the future.
How the Banks will qualify you
After you have calculated your budget and determined a figure you are comfortable with paying every month, the next step is to look at how the bank will qualify your affordability.
There are 3 major considerations here:
- Gross Income
- Net Surplus Income
- Credit Record
Most Banks will look at a combination of a percentage of your Gross Income and your Net Surplus Income, and take the smaller of the two calculated amounts as a maximum bond repayment amount.
Gross Income
In most cases, a bank will not allow a bond repayment to be more than 30% of the purchaser’s gross income (Combined income if more than one person is applying for the loan).
Example: You earn a Gross Salary of R30 000 per month before tax and other deductions.
R30 000 x 30% = R9 000.
This means the bond repayment can’t be more than R9 000 per month.
If you are buying with a partner or spouse, the same will apply to the combined income of both parties, e.g. Husband earns R30 000 Gross Salary & Wife earns R30 000 Gross Salary, Total Gross Income will be R60 000 x 30% = R18 000.
Net Surplus Income
Now that you have determined the max affordability based on your gross income, the next step will be to prove to the bank that you can afford the monthly repayment. This is normally calculated by taking your income after tax & deductions, minus your monthly expenses (excluding any rental that will fall away when you purchase the property) and you are left with you Net Surplus Income.
Example 1:
Gross Income R30 000
Tax & Other Deductions R5 500
Net Income (A) R24 500
Expenses
Rent R8 000 (Not taken into consideration – expense will fall away)
Utilities R500
Car Finance R3 500
Credit Card R800
Insurance R1 200
Other Expenses R2 000
Total Expenses* (B) R8 000
(Excluding expenses that will fall away with purchase of the property)
*This is not a complete list of expenses. This list is only used for illustrative purposes
Net Surplus Income: (A-B) R16 500
30% of Gross Income: R9 000
The bank will normally use the smaller of these two calculated figures to determine your maximum bond repayment capacity. In the above example that will be R9 000 per month.
Example 2:
Gross Income R30 000
Tax & Other Deductions R5 500
Net Income (A) R24 500
Expenses
Rent R8 000 (Not taken into consideration – expense will fall away)
Utilities R500
Car Finance R6 000
Credit Card R2 000
Personal Loan R1 000
Insurance R1 200
Medical Aid R2 000
School Fees R1 500
Other Expenses R2 000
Total Expenses* (B) R16 200
(Excluding expenses that will fall away with purchase of the property)
*This is not a complete list of expenses. This list is only used for illustrative purposes
Net Surplus Income: (A-B) R8 300
30% of Gross Income: R9 000
The bank will normally use the smaller of these two calculated figures to determine your maximum bond repayment capacity. In the above example that will be R8 300 per month.
Credit Record
Lastly, and most important, is your credit score. After identifying your affordability, the bank will look at your credit record. This will determine the Loan-to-Value (% of the purchase price granted as a loan) as well as your interest rate. A good credit score will increase your chances of a 100% bond, as well as getting a low interest rate offer.
If your credit score reflects poorly, you might receive lower loan-to-value offers e.g. 90% finance which will require you put the balance of the purchase price down as a deposit. You could also possibly receive an offer with a higher interest rate.
The right bond amount?
Now that you have roughly determined how much your maximum bond repayment on a monthly basis can be, it is time to see to which size bond that translates into.
The easiest way to do this is to make use of a variety of bond calculators available online. Most banks have their own bond calculators, and it is quite easy to find one via Google. These calculators can be used to determine the monthly repayment on a purchase price, or the bond amount from your monthly repayments.
From the two examples above using an online bond calculator, the purchase amounts were calculated as follows:
R9 000 per month (Based on Current Prime Interest Rate of 10.25% over 20 years):
Purchase Price of R917 000
R8 300 per month (Based on Current Prime Interest Rate of 10.25% over 20 years):
Purchase Price of R845 000
Now that you have a more complete understanding of how to afford your dream house, we trust you will find more joy in buying your own property. Keep watching this space for rest of our Property Buying Tips brought to you by Foce Property Investments.
