According to statistics from the South African Savings Institute, at the end of 2014 the average household debt to disposable income ratio was around 78.3%. Essentially what this means is that the large majority of consumers in South Africa are not able to put money aside for savings because of their high personal debt levels. Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa, says that compared to other emerging markets throughout the world, South Africa is considered to have a low savings rate. “The result of a low savings culture among consumers means that few have the cash reserves to make large purchases and will therefore be forced to rely on financial institutions to loan them the money. This once again pushes up their debt-to-income ratio and means that they are viewed as less creditworthy by financial institutions. As higher debt levels mean that a consumer is classified by lenders as higher risk, they will more than likely be paying a higher interest rate on their bond, if it is approved,” says Goslett. He adds that those who don’t currently have savings in place but would like to purchase a property in the future will need to make some financial adjustments to start putting money aside. “With electricity tariffs and the cost of living rising, it has become increasingly more difficult for potential buyers to prepare for purchasing a property. It will take a lot of discipline, but as a first step potential buyers will need to focus on lowering their debt levels where possible. Bringing down debt is necessary as obtaining the finance to buy a home is closely linked to an applicant’s affordability ratio. This highlights the extreme importance of personal financial planning,” says Goslett. Since the introduction of the National Credit Act in 2007, affordability has been a key aspect for potential buyers to focus on. While it was commonplace for buyers to be able to secure home loan finance without some form of a deposit pre-2007, in today’s market most buyers will need to show that they have a portion of the home’s purchase price saved up in cash. Ideally buyers should have around 10% to 30% of the purchase price saved up, along with the other costs associated with a property purchase such as transfer duty and attorney’s fees. “During 2007 the bond approval rate was around 70%, however this dropped down to approximately 28% the following year. Over the last seven years consumers have grown more accustomed to bond approval requirements. Bond origination group, BetterLife Home Loans, points out that only 29% of home loan applications submitted to lenders in the first quarter of this year were declined outright. This is an improvement from the 32% a year ago and 38% during the first quarter of 2013,” says Goslett. “It must be noted however, that while there has been an improvement in bond approval statistics, it does not mean that banks have eased up on their lending requirements.” Lending criteria remains stringent with banks placing a high emphasis on a buyer’s affordability. When assessing a bond application, the overall picture of the client’s credit history is taken into account including aspects such as the total amount of credit outstanding as well as the applicant’s ability to pay off debt. Goslett says that there are several ways in which consumers can show higher levels of affordability:
Seek the expertise of a professional financial adviser and planner, who can assist in formulating a personal finance plan
Create a budget which includes savings and stick to it
Avoid buying luxury or unnecessary items
Shop around – comparing prices to ensure you find the best value for items and services
Stay away from credit - rather pay cash whenever possible
Review all policies and medical aids annually to ensure you are getting the best possible deal
Go green - save on electricity and water costs by cutting down consumption
“Those who are able to cut down on their spending and reduce their household debt-to-income levels will be in a far better positon to show the affordability levels necessary to purchase a home. Although it requires discipline and it may be difficult at first, consumers will need to initiate a finance plan that works for them in order to keep their homeownership dreams alive,” Goslett concludes.
