How to best qualify for a bond

How to best qualify for a bond

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Are you planning to buy a home, whether as a primary residency or as an investment? Buying a house can be an expensive investment. Often than not, one will need financial assistance to make the dream of buying a house a reality. This is because buying a house out of your own money is nearly impossible or requires you to save money over a significant amount of time, several years to be specific.

In this article, I hope to help you prepare yourself to get your first housing finance. How then do you qualify for a bond? Banks work like robots. They follow a strict set of rules when assessing your application for a bond. This may mean that you may even be disqualified even when you can afford to repay the amount applied.

If your bank does not approve your application, stay calm banks are not the only bonds providing institutions. To increase your chances of getting approved for a bond, you can go through bond originators like Ooba or SA Home Loans.

What are the advantages of using a bond originator? 

  • Most bond originators provide a free service and will send your application through to all major banks. As a result, you will incur little to no costs at all whatsoever.
  • Your chances of getting approved increase because:
    • They will not send your application unless they are convinced that you will get approved
    • They will send your application to more than one bank. As a result, you may in fact get the most affordable bond terms. It is the bond originators job to ensure that the applicant get the most affordable rate
  • You save a significant amount of time as you will not have to go around shopping for a good rate among all banks
  • Bond originators know what banks require to successfully process a bond application. So, they will prepare your application for success

Tips to secure a better bond: 

  • Start by restructuring your budget. Consider what you ready need vs. what you do not need. Get rid of all unnecessary items on your budget. This will ensure that you have more disposable income that will otherwise go towards your bond
  • Get rid of all your bad debts. Bad debt is debt incurred to purchase things that quickly lose their value and do not generate long-term income. It carries a high interest rate, for example, credit card debt. Having a lot of debt is one of many sources for a bond application being declined. Creditors believe that a customer with a lot of debt has a higher chance of missing their repayments.
  • Save up a large deposit. Not all banks will give you a 100% bond. Besides, a huge deposit will save a bit on interest. Also, you may need money to pay for transfer costs banks may not cover. Most lenders also require the borrower to have at least 10% of the capital outlay
  • Have a payslip. Most bond providers need proof of income. A good start is a payslip. Even if you own your own business, have a payslip. Ensure that you have money going into your personal account every month.
    • NB – A payslip is good, but remember at the end of the day what the banks are looking for is your affordability. That is, do you have the ability to service the debt. If you pay yourself or if you get a big salary but what is left in your bank account, after all, expenses are paid for, is too little then you may end up not qualifying for the amount you are looking for.
  • Have financial statements and management accounts. If you own your own business, have your business’s financial statements and management accounts (latest) ready. Banks will use these to measure your affordability and to see how much income (drawings) you are getting from the business.
  • Check affordability – before you even start applying check if the property is affordable. Ensure that the property price is affordable in relation to its location. Further, you need to determine if you can personally afford the price and are able to pay for this house. Affordability is generally calculated at 25% to 30% of joint gross income. But, remember there are other factors, including existing debt commitments that may affect the size of the loan that the credit providers may grant you.

What should accompany your application? 

Based on my experience with bond originators like SA Home Loans and Banks like Nedbank and FNB, at a minimum you should have the following before you send your application:

  • The application form from the bank or bond originator
  • Your statement of assets and liabilities. If you keep a personal data room (also see: https://wordpress.com/read/blogs/143769079/posts/13), you should have the latest updated statement at your disposal. If you maintain a set of your personal accounts, then it should be easy to print out your balance sheet from your accounting system.
  • Your latest payslip or/and IRP5. You can easily get these from your employer.
  • Certified copy of your ID/passport
  • Proof of residence
  • Latest six months bank statements. If you are applying through your bank, this may not be needed as your bank has access to your bank statements.
  • Your most recent ITA34 – income tax assessment, which may also be used as proof of income
  • Income letter from your accountant or auditors
  • If you own and run your own business:
    • Latest signed financial statements
    • Letter confirming shareholding in the company or close cooperation
    • Latest management account, which should cover the latest complete month up to the last signed financial statements month

What if I am a foreign national or non-resident: 

There are certain restrictions for non-resident property buyers:

  • You may be required to raise 50% for the property price. For example,

A non-resident who wishes to purchase a property in South Africa for R900,000.00 provided R450 000.00 is introduced into South Africa to effect the purchase he/she would be able to apply to the South African Reserve bank for permission to avail himself of a bond of R450 000.00. In other words, banks will lend up to 50% of the purchase price.

  • The requirement for a temporary resident or permit holder is almost similar. The only exception is that such a mortgage bond is not restricted and depending on the standing of the client can be 50% of the purchase price of the property. The approval of the foreigner application is dependant on the approving manager in the bank where the application is made or where he/she holds his bank account.
  • You may want to read this: https://www.ooba.co.za/resources/financial-assistance-foreign-buyers

Requirements for permit holders (Source Property24): 

  1. Temporary Residence Permits

The applicant:

  • must have a valid Work permit which has at least three years remaining before its renewal date
  • at the time of the bond, the application must be working for the same employer reflected on the Work Permit.

IMPORTANT THING TO KEEP IN MIND:

Most banks restrict home loans for Temporary Residents to 50% of the purchase price of a property but Nedbank currently offers up to 90% if the applicant has banked with them for a minimum of a year. These terms are fluid, however, and the banks can change their policies at any time. If you are a foreigner (or have a foreign partner) and you are looking to purchase a property and apply for a home loan it is CRITICAL that you approach a reputable and experienced mortgage originator who will provide you with the very latest information.

  1. Permanent Residence Permits.

 

The Permanent Residence Permit confers on holders the same rights to mortgage loans as apply to bonafide South Africans (i.e. they are not restricted to 50% loans.)

However, some banks will not exceed the 50% loan-to-value until the applicant has been issued with the South African green bar-coded identity document.  This often places the applicant in an invidious position because Home Affairs has been known to take more than two years to issue such identity documents!

Other tips: 

If you can’t afford to buy on your own, you may want to buy together with a friend as a co-applicant. As time goes on, and you finish paying for the first house, you can repeat the process to buy a second house. Without a doubt, this must be a person you trust and you must find out if your bank is open to this set-up. If you are buying private, try and negotiate for alternative settlement plans for any amount in excess of what the bank is offering you provided your affordability and ability to repay the bank is not negatively affected.

I hope you are ready to buy your first home!

 

Contact us should you need any help qualifying or accessing mortgage

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How to pay for your house (bond) quicker

How to pay for your house (bond) quicker

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Do you want to know how to get fewer years to pay off your first property or how to pay for it quicker? Let’s look at a few ways through which you can do this, pay off your mortgage quicker. For this article, we will assume the property you want will cost R1000 000. We will also assume the repayment term to be 20 years straight without any reduction tactics.

  1. Raise a deposit:

This is the most important first step. Saving for a deposit will work in your favour because it can serve as an indication to the bank that you are a good personal finance manager. It also reduces your credit risk and exposure and makes it easier for banks to fund your first house.

Lets’s look at what the numbers will look like without a deposit:

  • Your monthly instalment will be R7752 over 20 years
  • This means, at the current interest rates, your total interest will be R860 480 by the time you finish paying for this bond in 2040.

Who covers the bond and transfer costs:

Another issue to consider here is that your first property will have transfer and bond registration fees. If you do not have a deposit, assuming your first property is R1 million, then you are looking at an additional cost of R55 712 in both transfer and bond costs. If you do not have any cash savings to cover this, you are more likely going to ask the bank to cover this as well. How does this change the numbers?

  • Your initial capital outlay increases from R1 million to R1 055 712
  • Your monthly instalment increases to R8 200
  • Your total interest over the 20 years increases to R910 288

2. What if you raised a deposit?

Lets’ assume you can raise a 10% deposit, that is R100 000 of the purchase price. Without complicating the maths with bond and transfer fees, you have already managed to reduce your loan amount to R900 000:

  • Your instalment falls from R7 752 to R6 977 monthly
  • You have also now managed to reduce your total interest over the 20 years to R774 480

So, you can already see how the deposit can help you to be able to qualify for a home loan more than when you did not have a deposit.

3. Negotiate the price:

You can also negotiate the price or buy directly from the seller without having to go through an agent. From personal experiences, I have noticed that most agents will increase the selling price by between 6 and 10% of what the seller is asking for. So, when you put your offer, assuming you will be the first one and the seller accepts, put an offer that is between 6 and 10% lower than what the agents told you the house is worth.

The reason for this is because the agents are not your friends. They are in the business of making money through commission and they might want the owner to still get what your actual offer would have been after the agent’s commission.

Assuming the same examples as above, and assuming you have been able to negotiate the price by 10%, this is what the numbers would look like:

  • Your purchase price is now R900 000.
  • Because you raised a deposit of R100 000, your initial loan amount is R800 000
  • Your monthly instalment falls to R6 202 as compared to the original R7 752
  • Your interest is now R688 480. What a saving on interest!

4. Negotiate the interest rate:

In the book “Is your thinking keeping you poor,” Douglas Krugger talks about the concept of being able to represent your interest. One example he gives is that of an employer and employee. He asks whether we negotiate employment contracts with employers before we start working. If we do not, he urges us to do so because a contract is just a document that documents the interests of two parties. It is in our best interests to negotiate the terms of the contract that represents our interest.

The same concept should apply to negotiate for interest with the bank. The interest rate you see on those papers is in the banks’ best interests. What is your best interest? It is in your best interest to negotiate a better interest rate with your bank. I negotiate a minus 0.5% on my first house. I am sure you can do the same.

If this sounds like a huge mountain for you to climb, apply to a few banks and use the results of your application for negotiating with the banks to get the best interest rate you can get.

5. Pay extra if you can:

In this article, I referred to some advice I received from my property mentor, let me repeat it here for the benefit of those that have not seen this article yet:

  • If you have a high-value vehicle, sell it and put the money into your bond.
  • If you pick up even a ten-cent coin, put it into your bond.
  • Pay your bond as quickly as possible and get onto your next property, preferably within 5 years.
  • If you are renting out your property, make it unique and different from other properties in your location so that you always have tenants and tenants who are willing to pay for whatever you ask for.

Why is this so? Interest on your bond is calculated daily. So, whatever you put into your bond works in your favour by reducing the interest. If you can, and because interest rates are low right now, pay more into your bond as much as you can.

6. Are you self employed?

If you are self-employed, you might have already noticed that it is more difficult for you to qualify for a bond than it is for your employees. My advice for you is this simple, take a salary(have a payslip for it) from your company/business consistently and make sure this salary lands in your account on the same day every month. Secondly, your business and you are two different people. Do not treat your business as your second personal bank account.

7. Emergency fund:

The pandemic has reminded us how important emergency funds or excess funds in our bond accounts are. Most of us had to negotiate for a payment holiday because we did not have an emergency fund or any funds available in our bond accounts. What was the effect of this? Had it not been for the reduction in the interest rates, loan balances and instalments increased. This also implied more interest until the end of the bond because interest rates will not remain this low forever.

Let’s get talking:

  • What have you found a challenge when it comes to qualifying for a bond?
  • What other tactics have you used to pay off your bond quicker?

Drop a comment in the comment section. I reply to all comments. And even better, others can also cheap in and help. We are all about sharing ideas that can make us grow together.

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