Bond Affordability

[marhsava]

So there are a few comments with this post and above that are correct and slightly misleading. So I did a lot of Bonds, share based lending etc credit assessment, now business assessment.

With that being said

The comment regarding 33% of gross is just about spot on
Additions to income ARE EXCLUDED IN THE CALC. Even if you get a travel allowance and fuel allowances it will be excluded as we assumed it to be outside of package, irregular and to be conservative excluded. So remove it when you do the calculation
ITC scorings of around 650 or more as a minimum for application
Credit scoring is more related to behaviour. How do you pay for credit cards and existing debt.
NO MICRO FINANCE. This is seen very negatively so avoid it
Joint bonds are not as favourable only in that it beefs up the overall LTV or value you may both apply for BUT prevents the bond from being transactional in the future in that you wont be going forward able to access equity in the bond if its joint. Its more a backend system as this is prevented as we are not always certain of the status of marriages etc and is a fail safe to prevent risk to the bank.

Interesting notes: Large deposits DO NOT REDUCE RATE. It is in fact the opposite. The larger the bond ie most profitable levels are at 100% finance over 1.5 million and more. When you reduce the LTV you lend, you have far less margin to work with for working with rate. The advice I always gave people was:

Apply for the home, at full value. If approved, have the bond payout, and make a 10% deposit you would have had back into the bond to amortise and affect your rate positively, or have it accessible as equity after it amortises over its period. Ie reduces the longer you leave it in your bond.

The above applies for a car as well and is in effect more strict as it is medium to short term finance, and people live beyond their means.

I wonder how much debt is to much of debt

 

[ahmedy]

Is there any recommended sites which gives you the most accurate calculations regarding the possible duties and fees one would be liable to pay when taking out a bond?

 

[Greg C]

I wonder how much debt is to much of debt

So theres a rule of thumb in two parts of the game. These are unwritten laws and when you have worked in finance and banking as long as I have you tend to remember them

So the rule

1) Golden rule UNSECURED lending IE credit cards, overdrafts, personal loans etc, are limited to 10% of your overall turnover as an individual OR as a business. Ie I earn gross R40 k, x 12. I get R480 000k per year. As a yard stick this puts your unsecured lending as a total for credit cards etc at around R48-R50 k. Obviously people will have more but use this as a yard stick.

2) Gearing individual and business prudency. Overall gearing set at 2.5 to 3 times of NAV. Remember this is Asset less your liabilities Not what you house is worth.

If my net worth is 1.5 million be it business or personal, you may gear yourself Ie take up debt securitised by an asset such as a house or equipment etc to around 4.5 mill to R5 million Before either a review is needed, or to reduce levels of debt at a financial institution.

Follow these generic rules and you will be fine on home loans and business asset finance etc
Noting above assumes you aren't making an assess loss or net deficit on monthly income or yearly income from expenses

 

[Foxhound5366]

Fascinating Greg C, thanks for sharing! The bit about a large deposit not giving you a better interest rate definitely flies in the face of everything I've heard before (which is that the 'safer' you make it for the banks then the more willing they'll be to give you a better rate).

 

[paul5186]

Is there any recommended sites which gives you the most accurate calculations regarding the possible duties and fees one would be liable to pay when taking out a bond?

https://www.ooba.co.za/calculators/bond-and-transfer-costs-calculator

 

[marhsava]

So theres a rule of thumb in two parts of the game. These are unwritten laws and when you have worked in finance and banking as long as I have you tend to remember them

So the rule

1) Golden rule UNSECURED lending IE credit cards, overdrafts, personal loans etc, are limited to 10% of your overall turnover as an individual OR as a business. Ie I earn gross R40 k, x 12. I get R480 000k per year. As a yard stick this puts your unsecured lending as a total for credit cards etc at around R48-R50 k. Obviously people will have more but use this as a yard stick.

2) Gearing individual and business prudency. Overall gearing set at 2.5 to 3 times of NAV. Remember this is Asset less your liabilities Not what you house is worth.

If my net worth is 1.5 million be it business or personal, you may gear yourself Ie take up debt securitised by an asset such as a house or equipment etc to around 4.5 mill to R5 million Before either a review is needed, or to reduce levels of debt at a financial institution.

Follow these generic rules and you will be fine on home loans and business asset finance etc
Noting above assumes you aren't making an assess loss or net deficit on monthly income or yearly income from expenses

So that means if you have two credit cards you are screwed

 

[Foxhound5366]

So that means if you have two credit cards you are screwed

You can have them, just don't max them both.

 

[SauRoNZA]

Is there any recommended sites which gives you the most accurate calculations regarding the possible duties and fees one would be liable to pay when taking out a bond?

FNB

 

[Tomtomtom]

I wonder how much debt is to much of debt

That's the question you should start with.

You can be pretty sure that the banks' maximal loan offers are too much, by design. Lenders want to maximise profit, and that means offering the largest loans they can while not killing the golden goose.

The reason they offer at 33% of gross and not say at 80%, is because at 80% the defaults would eat into their profit.

The reason they don't offer at 20% of gross is because they'd miss an opportunity to make more profit.

Take the banks' numbers and "golden rules" with a grain of salt. They're numbers that work for banks, not necessarily for consumers of debt.

Maybe you're comfortable paying 30% of your income out to your bond. But maybe you'd rather keep it at 20% or 10% or 0%.

 

[Pho3nix]

The above applies for a car as well and is in effect more strict as it is medium to short term finance, and people live beyond their means.

Wait.. vehicle finance is scrutinized more closely? Isn't it easier to sell a car then to get people out of a house if they default?

 

[Greg C]

Fascinating Greg C, thanks for sharing! The bit about a large deposit not giving you a better interest rate definitely flies in the face of everything I've heard before (which is that the 'safer' you make it for the banks then the more willing they'll be to give you a better rate).

So from a credit perspective. When you have securitised debt, it is irrelvent the deposit making it safer for the bank

THe deposit represents two things to the bank:
1) The deposit is there to reduce the LTV (Loan to value) thus making it more affordable to the client in a case where if applied at full value cannot afford the house with current credit covenants and credit affordability requirements

2) It adds equity. Ie if a house is worth 1 million and the client puts in R100 000 and reduces debt to R900 000. That deposit represents equity in the property, unleveraged equity. It just means that you the client have more value in the property on a book value perspective as you owe less on its Market value.

The bank however has it securitised completely. Its their asset. As long as the valuation and the grid for such comes out that its not for instance a wood wall with termites etc and the grading of the property (for another time on property valuations for business and residential) keeps it within the matrix the bank will finance

This comment then relates to for instance. You are more likely to achieve a 100% bond finance on well established housing areas such as bryanston in JHB etc than you would if you attempted to purchase this in town.

The property itself and where it is and value plays a very large part in the process and the overall available finance ie 100% or not together of course with your affordability

Further to the comment above on the property. It is once again considered that a first time house buyer will more than likely achieve 100% finance. However if it is an investment property the likelihood of 100% is very low

One of our banking covenants in that when you hit 5 overall registered properties where you are a related party (not necessarily the owner) we limit the loan to value available to 60%. Reason because we refuse to allow the bank to become a property nest and allow for over leverage and property bubbles.

Anyway I digress have fun with the bond application.

 

[Thor]

Solid tips @Greg C thanks for the valuable insights.

 

[Greg C]

That's the question you should start with.

You can be pretty sure that the banks' maximal loan offers are too much, by design. Lenders want to maximise profit, and that means offering the largest loans they can while not killing the golden goose.

The reason they offer at 33% of gross and not say at 80%, is because at 80% the defaults would eat into their profit.

The reason they don't offer at 20% of gross is because they'd miss an opportunity to make more profit.

Take the banks' numbers and "golden rules" with a grain of salt. They're numbers that work for banks, not necessarily for consumers of debt.

Maybe you're comfortable paying 30% of your income out to your bond. But maybe you'd rather keep it at 20% or 10% or 0%.

Actually NO, whilst logically you have some points in a sense the requirement set has nothing to do with this. It is infact a regulatory requirements set out by CPA - consumer protection act. This is set by the act to limit and prevent individuals from over indebting themselves. It is also why it is followed by all banks. Some variables you mention play a part in our bad debt and covenant ratios but that rule was never set by the banks.

At the end of the day we are a business of taking from Paul to give to Pete, if not for CPA and Basel 3. Well lets just say that this is how regulations attempt to hinder loss.

 

[Greg C]

Wait.. vehicle finance is scrutinized more closely? Isn't it easier to sell a car then to get people out of a house if they default?

Yes indeed. For a 2 very simple and practical reasons. Yes you can sell a car faster as its more liquid, but adds more risk because

1) People from a credit risk perspective always tend to live and spend beyond their actual affordability, the car represents a lifestyle asset. If things go pear shaped, clients RUN with the car. and the costs associated to the bank and the risk of that vehicle are higher

2) Yes it is harder to get people out of a house, but because of it being a more stable asset, doesn't depreciate the same way,and the term of 20+ years the risk to carry the asset is lower and less scrutinised.

Realistically whilst the things people do to houses are crazy, atleast you still have the asset in some shape or form. Ive seen business clients default, strip the car, liquidate the business open a new business and deposit the scrap metal they sold on the car into the new business and as a bank will take us 2 years to settle the case, and we have effectively written that debt off and increase in claim underwriting premiums.

Its just seen that vehicles are mobile and have more risk attached than property historically.

Further to the above, vehicle finance is a quicker process, thus people can and do anything to get finance, Sale and lease backs, off sheet rentals etc where its still debt. At the end of the day I can atleast register a bond and the land and building is owned and valued. The vehicle can end up being anything or any shape realistically.

 

[Pho3nix]

Yes indeed. For a 2 very simple and practical reasons. Yes you can sell a car faster as its more liquid, but adds more risk because

1) People from a credit risk perspective always tend to live and spend beyond their actual affordability, the car represents a lifestyle asset. If things go pear shaped, clients RUN with the car. and the costs associated to the bank and the risk of that vehicle are higher

2) Yes it is harder to get people out of a house, but because of it being a more stable asset, doesn't depreciate the same way,and the term of 20+ years the risk to carry the asset is lower and less scrutinised.

Realistically whilst the things people do to houses are crazy, atleast you still have the asset in some shape or form. Ive seen business clients default, strip the car, liquidate the business open a new business and deposit the scrap metal they sold on the car into the new business and as a bank will take us 2 years to settle the case, and we have effectively written that debt off and increase in claim underwriting premiums.

Its just seen that vehicles are mobile and have more risk attached than property historically.

Further to the above, vehicle finance is a quicker process, thus people can and do anything to get finance, Sale and lease backs, off sheet rentals etc where its still debt. At the end of the day I can atleast register a bond and the land and building is owned and valued. The vehicle can end up being anything or any shape realistically.

Thanks for for the detailed response!
Makes a lot of sense.