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How banks assess loan applications
Jason Heywood - Nedbank Home Loan Specialist

Affordability has been singled out as having become a key factor in the South African housing market according to Absa Home Loans.

Affordability is a key factor in the South African housing market and banks' lending criteria has tightened up, but in some instances applicants are reportedly still able to qualify for 100 percent loans.

In its quarterly review recently, the bank said the focus of demand for supply of housing is set to be on smaller-sized and higher density housing because affordability is set to remain a key factor into the future.

Absa also said it still lends up to 100 percent home loans to would-be home buyers even in this market but only if they qualify. However, many Property24 readers have disputed this statement and questioned Absa and other banks' lending criteria. In response to an article published recently on Property24, readers have said their applications were turned down as they were not Absa clients and therefore regarded as high risk applicants.

One reader said the bank approved only 60 percent because they were not an Absa customer while another would-be buyer's application to switch to Absa was declined despite a good credit history only to be approved by another bank.

Following this article, readers wanted to find out what the banks' lending criteria is when assessing home loan applications. We have asked all four major banks (Absa, FNB, Nedbank and Standard Bank) to give us a low down on how they assess each home loan application.

Absa Retail Bank chief executive officer, Gavin Opperman says the bank is committed to fulfilling its role in response to the government's call of housing the nation.

"We believe that the aspiration to house the nation is an important part of strengthening the social fabric of the country and will give people self-esteem and dignity."

He explains that in line with the National Credit Act, the bank's lending criterion is informed by the customer's affordability and credit worthiness and taking into consideration some factors as discussed in the table below.

Some macro factors that influence the bank's lending criteria include the prevailing economic cycle and prospects for economic growth, inflation and interest rates. Household finances (income, consumption, saving, credit growth, debt and debt servicing), residential property cycle and prospects and consumer risk profile (debt ratios, debt repayment and credit records) are considerations says Opperman.

What criteria do you use for assessing a home loan application?

  • current debt repayment behavior
  • credit history
  • affordability
  • net disposal income
  • household finances
  • residential property cycle and prospects
  • prevailing economic cycle
  • consumer risk profile
  • latest copy of applicant's payslip
  • bank statements in some cases
  • self employed applicants will need to supply a signed personal statement of assets and liabilities as well as a balance sheet and financial statement for the business from which income is derived
  • a commission earner will be required to submit the last six months commission earnings statement
  • minimum income (single or joint gross monthly income) + R2500- minimum loan amount R100 000
  • maximum repayment term 25 years
  • acceptable credit record
  • payment by debit order
  • the property must be in good condition and acceptable to the bank
  • a loan-to-value criterion plays a major role in what the customer can qualify for.
  • documents required depend on whether the applicant is employed or self employed, has a Standard Bank transactional relationship or not and if they earn a fixed or variable income.
  • generally, document requirements are less onerous for customers that have a transaction account i.e. Employed SBSA applicant with fixed income would need to provide the latest payslip and an offer to purchase.
  • non Standard Bank customer with fixed income customer would need to provide the latest payslip together with the latest three months consecutive bank statement reflecting three months' salary deposits.

What percentage of the property value can be borrowed and what percentage deposit does the bank require in order for a home loan to be approved?

The current prevailing home loan base rate is 9 percent.

This will be determined by the risk profile of the applicant but should one qualify, the bank can give up to 100 percent loan-to-value transactions.

Nedbank clients applying for new loans:

  • less than R1. 5 million - 95 to 100 percent
  • more than R1.5 million - 90 percent
  • over R3 million 80 percent

Non-Nedbank clients applying for new loans:

  • Less than R3 million - 90 percent
  • Over R3 million - 80 percent
  • Nedbank requires a 10 percent for a home loan valued over R1.5 million and the bank assesses these loans according to the customer's risk profile.

The risk profile of the customer and the loan amount determines the required deposit.

What types of home loans are available and which of these offers the best variable/fixed interest rate?

Customers can choose either a variable or fixed interest rate option. A variable interest rate is a fluctuating rate based on the prime lending rate, as set by Absa from time to time. If the prime interest rate changes, the client monthly repayments will change. A fixed interest rate is an option whereby the client is guaranteed a fixed interest rate for a predetermined period of time, of up to two years. After this period has expired, the interest rate simply reverts back to the prime linked rate applicable at that time.

There are various products and it is up to the applicant to choose which best suits their needs. Normally, a variable interest rate applies but the applicant has an option to apply for a fixed rate subject to certain conditions.

Ordinary home loans

  • the residential home loan is a flexible product that can be tailored to suit the customer's individual needs.
  • it can also be used for the purchase of an established residential property or the construction of a residential property in a proclaimed township.

Building loans

  • This loan used to finance the construction of a dwelling, additions or improvements to an existing dwelling.
  • Progress payments are made against completed work subject to pre-determined number of draws. Nedbank carefully monitors the building project in order to ensure that your home is completed within a reasonable time.
  • The product type does not have a bearing on the rate offered, be it fixed or variable.

Traditional Home Loan, First-time Home Buyer which includes costs up to a maximum of 104 percent and Building Loans.

The Traditional Home Loan, whether variable or fixed, provides the best rate to the customer. The fixed rate offers the customer peace of mind for up to three years.

Will the bank give pre-approval of the home loan with no upfront fees?

According to the National Credit Act, financial services providers are prohibited from granting pre-approved finance to customers.

Yes, it is called a "Passport to Purchase" where no upfront fees are levied and this pre-qualification is valid for 90 days.

Nedbank does not grant pre-approvals. Customers can read through the information on the Nedbank's website to determine what they can afford through various calculations.

A customer can apply for a pledge via the internet or through the Standard Bank Call Centre. No fees are charged for pre-approvals.

Upon approval of the loan, will I have to take out the bank's mortgage insurance?

While we insist on customers insuring their mortgage, we do not compel customers to take up mortgage insurance with Absa.

Mortgage insurance is vital for the protection of the most valued asset - the home.

Insurance cover is required to protect both the bank and customer. This may not necessarily be that of the bank but must be a reputable company that meets the requirements of FNB.

Customers have the choice to either make use of Nedbank Home Owners cover or opt for cover supplied by other service providers.

Insurance is required as part of the agreement and customers have the freedom to choose which insurance provider to use.

What is the interest rate charged on home loans currently?

The current prevailing home loan base rate is 9 percent.

The interest rate is related to the risk associated to the lending in line with the bank's lending principles and underwriting practices.

The interest rate applicable to a home loan varies from customer to customer and is determined by individual risk profiles.

The rate is entirely dependent of the customer risk profile.

What extras come with the home loan?

Absa MyHome

  • A product which is focused on providing affordable housing. It has the following extras.
  • free voluntary HIV/Aids Treatment Program: Customers who access 100 percent LTV (Loan to Value) automatically qualify for the Voluntary HIV/Aids offer, at no costs to customers.
  • this proposition includes free voluntary medical examination and free anti-retroviral treatment (ARV). As part of the package, we also maintain the customer's home loan instalment if he/she is unable to work because of illness until he/she recovers, at no cost to the customer.
  • repayment term of the loan whereby customers can opt to extend the term of the home loan up to 360 months as opposed to the normal lending term of 240 months. It is, however, important to note that the interest charged over a longer term is higher compared to a shorter one.
  • this benefit is also applicable to the traditional Absa Home loans customers.

Home Owners Comprehensive Insurance (HOC) - Absa has designed an HOC product for all our home loan customers.

  • the product covers the physical structure of the home in case of damage caused by storms, floods, fire or other disasters.
  • when our customers take up the HOC product with Absa, they save on their monthly home loan service fees. HOC is a compulsory requirement and customers have the freedom to select the insurer, as long as the policy meets Absa's minimum requirements.
  • this benefit is also applicable to the traditional Absa Home Loans customers.

FlexiReserve - Advance Option

Customers can have access to all pre-paid amounts paid into the home loan account.

  • these are amounts paid over and above the normal monthly instalments.
  • this benefit is also applicable to the traditional Absa Home Loans customers.

Home Loan Protection Plan (HLPP): The HLPP product is a life policy that is designed specifically for Absa Home Loans customer and it includes death and permanent disability.

  • unlike the normal credit life product, the product does not prescribe a medical examination.
  • under this service offering, customers enjoy a wide range of cover options which include death, disability, critical illness cover and income protection.
  • this essentially allows beneficiaries to meet all their insurance needs in relation to protecting their loved ones and themselves in a single, comprehensive, policy.

Borrower Education (BE)

BE is applicable to all first-time home-owners and is a compulsory requirement of the loan.

  • the programme is specifically designed to educate our customers about all aspects of home-ownership.

Borrower Education is provided by external vendors after the final grant stage of the home loan process.

Absa Home Loans arranges this for the customers.

There are no extras.

NedRevolve facility

  • is an option that provides customers with speedy access to surplus funds, which accumulates should the customer pay more than the prescribed instalment or decides to make a lump sum payment to the home loan account.
  • any excess fund available in the home loan account may be credited to a nominated Nedbank account or an account linked to the customer's electronic profile.

HomeVision

  • a loan that allows the customer to register a bond, higher than the required loan amount thus creating a surplus amount that can be accessed later.
  • this facility becomes available to a customer when the value of the property has increased, the customer's income has increased and when the customer has to apply for the surplus funds, with each application being subject to the bank's credit approval policy.

First-time home buyers can qualify for costs up to a maximum of 104 percent Loan-to-Value, 20 to 30 year term, fixed rate and access bond.

These are all subject to the customer qualifying and prevailing credit criteria at the time of application.

Are there any exit fees?

The exit fee exists in the form of a penalty interest that is applicable when the customer has not provided the bank with a 90 days notice before cancellation.

In most agreements within the home loan mortgage industry, there are clauses to this effect whereby notice has to be given within a certain time frame.

After registration of the bond, customers are required to give 90 days' notice of their intention to cancel the bond and settle the account.

Three months cancellation fee is charged.

Do you give home loans to applicants who are not your clients?

Each customer has unique banking needs and we encourage customers to contact Absa directly in order to assist them in finding the most suitable financial solution.

Consideration is given to all applicants and there are divisions that cater for specific needs.

Banking with Nedbank is not a prerequisite to obtain a home loan.

Standard Bank does give home loans to non-customers.

How do customers contact the bank?

Log onto the Absa website or call our Home Loans Call Centre on 0860 111 007 or a Home Loans Express Agent for a visit on 0860 999 123 - it's a free service.

For more information on different FNB Home Loans offering, visit the FNB website.

For more information on Nedbank Home Loans, visit the Nedbank website.

For more information on Standard Bank Home Loans, visit the Standard Bank website.

Property24 did a quick check on the basic documents required and essentially, for all four banks an applicant will be required to submit proof of income (three months bank statement), certified copy of identity document and proof of current residential address.

7 Ways homeowners can save money
Jason Heywood - Nedbank Home Loan Specialist

There are usually ways that you can save if you make the time to sit down and face the facts about your spending habits.

With living expenses on the rise and distressed property sales a reality for many South African homeowners, some may want to tighten the belt and find ways to save, says Adrian Goslett, CEO of RE/MAX of Southern Africa.

While there is no quick fix to a high debt-to-income ratio, he says, there are definitely areas where homeowners and other consumers can cut back on their spending.

"Although factors such as the current low and steady interest rates have been favourable for homeowners, other factors such as the hike in electricity tariffs has continued to place pressure on many South African consumers," says Goslett.

He adds that homeowners who are looking to save money should consider the following ideas:

  • Have a budget - As the saying goes, those who fail to plan, plan to fail. Write down all the monthly expenses required to maintain the home as well as all other expenses. Try to be as specific as possible and don't leave anything out. Rather be realistic or overestimate your expenses than leave anything out. Check previous months' bank statements to provide a clear picture of what to budget for each necessity. When the budget is completed, see what costs can be cut. Once the budget has been set - stick to it!
  • Go green - Where possible cut down on energy consumption. There are many energy-efficient options available to homeowners that can significantly reduce electricity costs. For example, homeowners can change out old incandescent light bulbs for compact fluorescents. Although there may be an initial outlay in terms of cost, this will be recovered by the monthly saving.
  • Check your insurance - While it is always important to be adequately covered by your insurance, needs change from time to time. It is always a good practice to relook at your insurance policies to ensure that you are adequately covered and that the coverage is still applicable to your requirements.
  • Compare before you buy - Most consumers will compare items that they consider large investments such as property or motor vehicles. However, by comparing smaller items as well, homeowners can save a lot of money. If two items are of equal quality and market reputation, price will be the only factor that separates them. The internet is a key tool for comparative shopping before the consumer has left the comfort of their own home. Use it to your advantage when looking for the best deal.
  • Pay bills on time - Homeowners can avoid interest charges or penalties that may occur due to late payments by paying on time. In some cases, if the account is paid early certain service providers, such as doctors, will give preferential rates or discounts.
  • Stay healthy - Certain medical aids have reward systems that allow participants to enjoy the benefits of discounts on specific services. Eating healthy food and exercising will also result in better living, which will reduce the chance of sickness and in turn reduce medical bills. Having a proper eating plan will also reduce money spent on unnecessary food and wastage.
  • Keep it simple - Extravagance costs money. We all enjoy the expensive weekends away and fancy dinners, but deciding to eat in or stay home for the weekend will save homeowners a small fortune. Staying home doesn't have to mean being boring. Be creative and have a candlelight dinner in the back garden.

"While these tips are more like a first-aid approach rather than a cure, homeowners can benefit from having some extra money and savings for a rainy day. It is important to manage money efficiently to ensure future financial health," says Goslett.

Home additions that really add value
Article By Wesley Barnard - Remax 23 Jun 2011

Many homeowners are opting to renovate their home to accommodate their changing requirements or to fix it up before they sell with the hope that it will add to the market price of the property. While home improvement projects can really add to the appeal and practicality of a home, some will add more value onto the bottom line than others.

Adrian Goslett, CEO of RE/MAX of Southern Africa, says that homeowners undertaking renovation projects cannot expect to splurge on expensive fittings and fixtures and recoup the value of the project when the house sells. "Just because you spent R200 000 on home improvements does not mean that your house is worth R200 000 more," he says.

Goslett explains that factors such as the direction of the general housing market, the value of homes in the neighbourhood, the nature of the renovation project and how soon the home is sold after the improvement project is completed will have a bearing on how much of the renovation cost is recouped.

"The general rule," he explains, "is that the longer the homeowner stays in the home after undertaking renovations, the less likely they are to recoup its value. This is because different owners have different requirements and tastes differ too. What one homeowner finds appealing, another may not and style and fashion trends can change dramatically over a relatively short period of time."

He says that homeowners should always remember that having the fanciest house on the block is not necessarily going to mean it will sell for the highest price on the block. In fact, Goslett warns, a house that is priced higher than its neighbouring homes could be perceived as overpriced even if it does have more value.

Goslett discusses the five top improvements that real estate experts agree pay off more often than not:

  • Kitchens
    Because many buyers see the kitchen as the heart of the home, even a few basic improvements to this room can really pay off. Consider including energy efficient appliances, stainless steel, new countertops, a new sink, a coat of paint and new flooring. Cupboards can also be sanded, stained, painted or replaced if necessary. Where possible a classic design and neutral paint tones are best as these will appeal to a broader range of people. A well renovated kitchen can recoup between 70% and 80% of remodelling cost when the home is sold.
  • Bathrooms
    Kitchens and bathrooms are known to get sellers the best boost in value, so these are the two areas of the home where renovation costs can be recouped the best. In fact, you should make back between 65% and 75% of your costs of remodelling a full bathroom and around 65% of the cost of adding a full bathroom. Consider new fixtures including a bath tub, a double sink instead of a single one, recessed lighting, new flooring and wall tiles if necessary and a fresh coat of paint.
  • Creating space
    As a rule, improvements that increase the functional space of a home hold their value longer than ones that just make a house look better. This option is also often significantly cheaper and less of a hassle than adding a completely new room to your home.
  • Security, windows and green products
    With increases in electricity and a generally higher cost of living, utility bill savings are a big advantage, and so it stands to reason that shrewd energy-efficient improvements can add to the resale value of a home. Efficient windows and doors, a new roof and perhaps maybe even solar panels may be pricey to install, but around 65% to 76% of this cost could be recovered at resale. Security features are also always an important consideration in the home buying process, and many South African homeowners will appreciate a strong security system in a home.
  • Basic Improvements
    The basics are always more important than fancy new fittings and fixtures. A beautiful new kitchen and bathroom will add no value if the roof is leaking or rising damp is a problem, for example. It is the basic improvements that will provide the greatest return on a home's value. Homeowners who are considering selling in the next year or so need to start any home improvements by tackling any problems with the home's structure or systems such as the plumbing before installing a Jacuzzi, for example.

Goslett says that there are also some home improvements and additions that are nice to have, but that add very little value to a home's selling price. These are:

  • Swimming Pools
    While nice to have and a great facility for many homeowners, a swimming pool adds no value to a resale price at all. In fact, some home buyers spend thousands of rands to fill in a pool after purchasing a property. Expensive upkeep and the fear of liability mean that for some, the responsibility of a swimming pool will detract from a property more than add to its value.
  • Manicured Gardens
    Manicured gardens which will require time and money to keep looking good usually won't add to the selling price. With today's hectic lifestyle, many homeowners are looking for hassle free and low-maintenance homes. While landscaped gardens certainly add appeal to any home, when it comes time to sell a property, a garden is not going to add to the price tag, and should rather be considered as investment for the owners' enjoyment. The same goes for expensive fences and stone walls. They look nice, but buyers don't pay up for them.

Lastly Goslett says that any homeowner wanting to undertake a home improvement project should be careful to keep within the limits of the neighbourhood. "Adding features such as a home theatre, games room, sauna or built-in bars are great projects if the owners are planning on staying in the home for a long time and are not too concerned about the resale value. The best point of reference to determine your ceiling is when it comes to renovating is to consult your real estate agent about property prices and requirements in your area."

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