Understanding affordability and home loans

Published on 28th February, 2023 at 06:10 pm

What does affordability truly mean when it comes to taking out credit like a home loan? And why does it pay to borrow less than what you can afford?

Reading time: 4 minutes

In this article you’ll learn:

• What credit affordability truly means.
• Why purchasing a property under your affordability is a smart consideration.
• How the Sanlam Reality building value calculator can help you protect against unexpected costs attached to your property.

If you’re currently paying a mortgage, you’ll have noticed your monthly payments have jumped substantially since November 2021. By January 2023, the Reserve Bank had hiked interest rates by 375 basis points in total, through nine separate hikes, in an effort to rein in inflation. Of course, transport, food and other essential goods all cost more now, so most families are taking some financial strain.

If you’re looking to purchase your next property, when it comes to home loan affordability, here’s what financial experts want you to know:

Housing should only cost up to 30% of your budget

Affordability is calculated using your net surplus income, which is your gross income less all expenses. “A home loan repayment should not be more than 30% of your gross monthly income and cannot exceed your net surplus income,” says Jackie Smith, bond originator ooba’s head of direct distribution and product management. Don’t forget to include other costs associated with home ownership, which can otherwise trip you up.

Certified Financial Planner^® Lood Conradie of ConradiePrisma BlueStar, authorised by Sanlam, agrees: “The 30% threshold must include the cost of building insurance, rates and levies. By purchasing below the maximum, you can make provision for the unexpected.”

If you’re new to the property ownership game, here are some important dos and don’ts for making a success of it.

You can use Sanlam’s home loan calculator to check the size of home loan you qualify for, and the impact of interest rate changes on your monthly repayment. In addition to your deposit, you should also budget for transfer fees, transfer duty (if the property you buy is more than R1 million) and bond registration costs, which are all once-off costs at the time of purchase.

The benefits of starting small

Buying below your maximum affordability can be a prudent move. You may be able to put down a larger deposit relative to the property price, with a smaller total loan – putting you in a better position to negotiate.

“Banks will likely view you more favourably in respect of interest rates. The lower the loan to value, the better the chances of the loan being approved at a lower interest rate concession,” says Smith. “A lower interest rate can save you a lot of money in respect of the capital amount payable.”

Most home buyers expect that their salaries will continue to increase over time, which makes it easier to afford your bond payments. However, Conradie advises caution: Even if you believe your salary is likely to grow over time, you should still be cautious when buying. “You may have to neglect other important provisions to get used to paying your bond,” says Conradie.

Are you looking to buy a second property? Here are the tax implications.

Inflation soars while wallets shrink

Household budgets are being squeezed as petrol, electricity and groceries all soar in price. Interest rates have also risen markedly, so debt – including home loans – now costs substantially more.

Property is one of the key investment options that can help you protect your capital against the eroding power of inflation. Read this for other investment options that hedge against inflation.

Finding it a challenge to afford your bond repayments? Try this:

Rework your budget

“Have a look at your monthly expenses and see where you need to spend less. Cut down spending on social activities, travel less to save on fuel, and focus on using less electricity or saving water,” says Conradie.

Ask your bank to restructure your payments

“Inform your bank ahead of time that you are struggling with the repayments. They can restructure your loan repayments so that you don’t default on your monthly payments,” says Smith.

Scale down before you default on your bond

“If you still can’t afford your repayments, you may need to scale back on your expenses by selling your existing property in favour of a smaller one. “If you can scale down, do so before you default and get a bad credit record,” Smith suggests.

Taking out building insurance is a smart move when purchasing a property. But how much should you insure it for? Use this building value calculator to help you calculate how much cover would be enough to ensure your property for its true replacement value.