Rent vs bond: the criteria

MANY South Africans religiously pay rent every month but would rather be paying off a loan for their own home.

Naturally, they ask why they cannot be approved for a home loan when their rental payments prove that they can afford to pay one off.

But do banks even consider the rent one pays when accepting or rejecting home loan applications?

The answer, says Leonard Kondowe, the finance manager for the Rawson Property Group, is yes – to a certain extent.

“Any positive credit profile is an advantage to applicants. However, the fact that you pay higher rent doesn’t necessarily mean you can qualify for a home loan with the same minimum repayment.

“This is because, when doing home loan affordability, a lot of factors are taken into account, not just disposable income.”

Echoing this, Angela Glover, the product head at FNB Secured Lending Cluster, says: “Consistent and full payments across all your credit or financial obligations will always count in one’s favour when applying for credit, and is hugely important.”

However, it is important to remember that owning a home comes with a lot of extra expenses that renting doesn’t have.

“As the owner of the home, you are responsible for maintaining it, fixing things that are broken, covering extras like insurance, and rates and taxes.

“We recommend having extra disposable income to help with these unforeseen expenses, and some savings to act as a buffer to maintain your home. You will also need access to some savings upfront to help you cover the costs of a new home loan, relocation and, maybe, a deposit.”

Kondowe agrees: “When one is applying for a rental property, the emphasis is much more on disposable income and their credit repayment profile. Furthermore, when a person is renting, there are some house-related expenses that are not met by them, but the owner of the property.”

He adds that when applying for a home loan, the recommended threshold is 30% of your gross income available towards repaying the loan.

“Having said this, the issue of disposable cash after meeting all other financial obligations would be taken into account.”

While you may “easily show” a higher gross income that would allow for 30% to be used to repay a bond, if your expenses are much higher, that would have an impact on the size of the home loan you can qualify for, Kondowe explains.

“Therefore, showing a track record of paying higher rental wouldn’t necessarily mean a client can qualify for a higher bond.”

More than half the country’s tenants pay R3 000 to R7 000 a month for their rental homes, and if they have to spend the amount on a bond repayment each month, the home loan value they would be granted – if the affordability criteria are met – would be R315 000 and R738 000 respectively, Kondowe says.

The rental bracket of R7 000 to R12 000 has long been known as the “sweet spot” as these tenants are the most reliable when it comes to paying their rent in full and on time.

But if they had to use the same amount to pay off a home loan every month, he says, the bonds they would qualify for – based on the prime rate and repaid over 20 years – would be:

• R7 000 rent – R738 000 home loan

• R7 800 rent – R823 000 home loan

• R10 000 rent – R1.054 million home loan

• R12 000 rent – R1.265m home loan

• R15 000 rent – R1.58m home loan

• R20 000 rent – R2.108m home loan

As a general rule of thumb, Glover says, your repayment is about 1% of your home loan, meaning that a R500 000 home loan will need a monthly repayment of R5 000 over 20 years.

“Of course, this varies, depending on your interest rate and the prime lending rate at any point in time. You can use online mortgage calculators to get to an exact amount, using different interest rates, repayment terms and deposit amounts.”

You will also need to consider that a home loan repayment of the same amount you pay in rent may not get you the same type of property. For example, while you may be paying R7 000 rent for your three-bedroom home with a garden, paying that amount on your bond means you have qualified for a home loan for what may buy only a two-bedroom apartment.

Remember, owning a home comes with a lot more expenses than renting does.