How much house can you afford?

Published on 30th March, 2022 at 10:21 am

Owning a house is a dream for many South Africans – but it’s important you do all your sums beforehand so that that dream doesn’t turn into a financial nightmare. Here’s how to figure how much house you can actually afford.

Most people buy a house with the help of a home loan, which is money lent to you, usually by a bank, so you can pay the full purchase price, while paying back the bank with monthly instalments. While house hunting, it’s easy to get caught up in the excitement of home ownership, but it’s important to always know exactly how much you can afford to borrow – before losing your heart to that mansion in Sandton.

How do you qualify for a home loan?

Banks (unfortunately!) don’t just hand out money to anyone who asks – you must show you can afford your monthly payments, and that the home you’re planning to buy will be an asset. “There are two main factors that determine your ability to qualify for a residential home loan: your credit profile and affordability,” says Linda Rall, provincial sales manager for Ooba Home Loans. “Credit lenders don’t extend a loan to someone with a poor credit payment profile. Based on the National Credit Act (NCA) of 2007, if you’re applying for a loan, you must be able to demonstrate that you can afford the finance in line with the NCA regulations to avoid reckless lending.”

This means that, by law, a bank is not allowed to lend you an amount of money than you can’t afford to repay, given your income and/or current assets. It also means banks need to make sure you have a history of good credit. “It is critical to have up-to-date financials (for the self-employed) and payslips (for employees),” says Carol Reynolds, Pam Golding Properties area principal for Durban Coastal.

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How do you know how much you can actually afford?

You might think you can buy a four-bedroom house with views over Clifton, while the bank says otherwise… Before you get your hopes up, you should work out exactly how much you can afford to comfortably pay back each month, instead of stretching yourself so thin that all your income goes towards loan repayments, leaving you with a piece of toast for dinner every night. It’s a good idea to get a pre-qualification, says Rall.

“The factors mentioned above are applied during the prequalification process to determine affordability and credit profile results. A credit bureau check is carried out at no cost, and income and expenses are investigated and confirmed to establish net disposable earnings,” says Rall. Most lenders will follow a rule of thumb that the maximum value of the repayment offered should be 30% of your gross monthly income. If you are buying a property with someone else, your income is combined and the 30% is based on that amount. “This is further dependent on the net disposable earnings of both applicants (meaning your income after you’ve paid all your bills and living expenses), which is required by the NCA to be equal or more than the monthly bond repayment,” she adds.

Are you in the market for a new home? Don’t forget about these six hidden costs when purchasing.

What is a debt-to-income ratio?

Financial institutions sometimes apply a debt-to-income ratio to assess your affordability, Rall explains. “This calculation is the ratio of monthly debt repayments as a percentage of your total income.” This means the bank will look at how much of your income you are currently spending on repaying debt, before deciding how large a home loan you can afford. Before applying for a loan, it’s a good idea to pay off as much high-interest debt as possible, for instance, store cards, credit cards and loans.

Overwhelmed with debt and not sure where to start? Our financial experts share five ways you can end debt anxiety and move towards becoming financially free.

What else should you consider when applying for a home loan?

When buying a property, you are not only paying back the home loan – there are extra costs associated with home ownership to make sure you are covered. “Additional costs include bond registration fees, bond/life insurance, transfer fees and transfer duty fees,” Reynolds explains. You can use an online bond calculator to determine your bond costs, registration costs and transfer fees so you’re not left with a nasty surprise.

Looking to take out a home loan? This handy loan repayment calculator will help you work out either your monthly repayments or how much money you can afford to take out on credit.

Building insurance is also compulsory if a bank is lending you money, Rall explains, except for sectional title complexes, where the insurance is covered by the monthly levies. Home loan protection is another insurance cost to consider: “This insurance protects the users of the property in the event that something happens to the bond holder, in which instance the loan would be repaid,” adds Rall.

When buying a house, it’s important to protect your home against the most unusual and unexpected events. Ensure your home matches its true replacement value by using this building value calculator.