The South African home loan market has seen dramatic changes in recent times with the introduction of the National Credit Act (NCA). Today we’re facing a new dilemma with banks changing their Loan to Value (LTV) criteria for home loans. The LTV criteria determines the percentage of the property’s value the bank will grant a home loan for.

Everyone knows the property market is very slow at the moment, so we’re not seeing a lot of properties changing hands. Sellers are dropping prices, and employing more estate agents and doing rain dances and then drop their prices some more, with not much luck.

Why would this be?

The simple and often overlooked answer here is cash flow. While we can understand that affordability after the inception of the new National Credit Act and high interest rates are taking monthly installments out of reach for many households, we often forget the big cash flow barrier to get your foot in the door caused by LTV criteria.

All banks have now, for various reasons, introduced more stringent LTV criteria. This just means, no more 100% loans (well, almost, with FNB being the last remaining exception, but we’re expecting them to change in the next couple of weeks). Yes, it’s true, if you buy property the bank will need you to put down a 5% or 10% deposit depending on the value of the property, before they loan you a dime.

Another unknown fact is that this does not depend on your own credibility or your assets or the way you manage your accounts or the stack of orange notes under your mattress. It does not matter if you are the Sultan of Brunei or if you just own a Playstation II that you still need to pay off. -You want the loan, you put down the deposit.

Currently only FNB will consider loaning 100% of the purchase price above the R300,000 mark, but one would expect them to follow suit with the other major banks soon. Here’s the Loan To Value fractions for the major players:

Loan to Value Caps
Loan to Value Caps

So let’s think about the cash flow again. Let’s look at a realistic example for a guy called Jack. Jack wants to buy a home for a million bucks: (R1,000,000)

Transfer Costs R38,000
Bond Costs R9000
Bond initiation fee R3,000
TOTAL R50,000

So, here’s the cash flow problem that Jack didn’t know about. Before the transaction is done, and before his R12,300/month payments start kicking in (his bond originator got him prime minus 1.7%) he will have to dig deep into his own pockets:Nope, you cannot cover these costs out of your home loan – this was previously possible by getting a 108% loan, those days are long gone though.

So before Jack can start hacking away at his R12,300/month loan installments he needs to get the property on his name at a cost of R50,000 out of his own pocket.

But wait, there’s more:

The bank will only grant Jack a 95% because of the new LTV criteria so he needs to get another R50,000 somewhere to put down as deposit!

So his true costs now become:

Transfer Costs R38,000
Bond Costs R9000
Bond initiation fee R3,000
Deposit R50,000
TOTAL R100,000

So, to buy his R1,000,000 property, Jack will need to have R12,300 left every month after he paid his fuel, DSTV, school fees, groceries and the guy watching his car while he shops.

He then needs to pluck R100,000 out of a hat, put it on the counter and say…”Tadaaa!…one Million Rand property, with fries on the side please.”

It’s now clearer that there are not a lot of people out there that can afford or has the cash on hand to buy a R1,000,000 property. The problem here is that even if the owner drops his price to R800,000, Jack will still need about R35,000 to cover his transfer and bond fees and another R40,000 for the deposit. So it’s not only a case of dropping your price anymore!

What it all boils down to: If you’re considering buying property and don’t have a cash stash somewhere, we’d recommend applying for your home loan straight away. FNB is bound to change their Loan to Value criteria within the next couple of weeks and after that you won’t be able to get a 100% home loan from anyone.

For further information or to apply for a home loan please feel free to call MyRoof.co.za on 0861MYROOF (0861697663).

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