Don’t bor­row more now if you want to be a home owner

George Herald - Private Property - - Property News -

The weaker rand, rock­et­ing fuel prices and the steep elec­tric­ity and mu­nic­i­pal tar­iff in­creases that are tak­ing ef­fect in many cities and towns this month could de­lay many fam­i­lies' hopes of be­com­ing home own­ers - es­pe­cially if they start bor­row­ing more to make ends meet.

So says Rudi Botha, CEO of South Africa's big­gest bond orig­i­na­tor Bet­ter­bond. "SA house­holds have come un­der in­creas­ing pres­sure this year, es­pe­cially since the VAT in­crease in April, and in re­sponse it seems that many con­sumers are now tak­ing on more debt again," he says.

"We are con­cerned that this could eas­ily re­verse the gains made over the past 10 years as South Africans worked re­ally hard to pay off their debts, and steadily re­duced the house­hold debt-to-in­come ra­tio from 86,5% in 2008 to the cur­rent 72%. Par­tic­u­larly wor­ry­ing is the rise in rate of unse­cured bor­row­ing, which in­cludes per­sonal and mi­cro loans, credit card bal­ances and overdrafts."

The lat­est Re­serve Bank sta­tis­tics re­veal that unse­cured credit ex­ten­sion in the house­hold sec­tor showed year-on-year growth of 5,3% at the end of May, com­pared to 3,1% at the end of De­cem­ber. And per­sonal and 'pay-day' loans, which make up al­most

59% of unse­cured credit, showed even big­ger growth of 5,7% at the end of May, com­pared to 2,7% in De­cem­ber.

Se­cured credit ex­ten­sion, which in­cludes home loans, leases and ve­hi­cle in­stal­ment sales, showed an­nual growth of 3,9% at the end of May, with house­hold mort­gage bal­ances record­ing year-on-year growth of 3,3%.

This means, says Botha, that an in­creas­ing per­cent­age of the av­er­age consumer's monthly take-home pay is be­ing used to re­pay "bad debt" rather than "good debt" such as a home loan. "What is more, this could get worse due to fur­ther fuel price hikes and this year's round of mu­nic­i­pal tar­iff in­creases, while the stag­nant econ­omy is mak­ing it dif­fi­cult for em­ploy­ers to of­fer wage in­creases that would im­prove the sit­u­a­tion. And prospec­tive buy­ers whose dis­pos­able in­comes are di­min­ished by ad­di­tional debt will find it more dif­fi­cult over the com­ing months to qual­ify for home loans, even though the banks are cur­rently ea­ger to lend to them."

The rea­son, he ex­plains, is that the banks don't only con­sider the ap­pli­cant's in­come and credit record when de­cid­ing whether to ap­prove a home loan, but also look closely at their reg­u­lar monthly house­hold ex­penses and ex­ist­ing debt re­pay­ment com­mit­ments.

"They are obliged to do this, in terms of the Na­tional Credit Act, to en­sure that bor­row­ers re­ally will be able to af­ford their monthly bond in­stal­ments with­out get­ting into fi­nan­cial trou­ble. But prospec­tive buy­ers should ac­tu­ally be con­fi­dent of this them­selves be­fore ap­ply­ing for a bond, and that is one of many rea­sons to con­sult a rep­utable bond orig­i­na­tor such as Bet­ter­bond as one of the first steps in the home buy­ing process. Our ex­perts know ex­actly what the banks re­quire and can sug­gest ways for bor­row­ers to im­prove their fi­nan­cial po­si­tion and credit pro­file be­fore ap­ply­ing for a bond. In ad­di­tion, they can ob­tain bond pre-qual­i­fi­ca­tion for buy­ers who are ready to en­ter the mar­ket so that they have a clear idea of what they can af­ford and can con­cen­trate on homes within their price range," he says.

"Then once clients are ready to buy, we can sub­mit their ap­pli­ca­tion to mul­ti­ple lenders and ne­go­ti­ate the most favourable terms and in­ter­est rate, which can make a sig­nif­i­cant difference to the even­tual cost of their prop­erty, and their long-term fi­nan­cial well-be­ing."

Is­sued by Bet­ter­bond

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