You are about to apply for a mortgage loan and you’re excited because your credit score is great, you’ve completed an online affordability test and passed with flying colours! Maybe you even have a pre-approval from your own bank or a Prequalification Certificate from a mortgage originator. All you have to do now is apply and let the offers roll in…

However, the banks come back with “DECLINED – due to affordability.”

After the initial shock, you’ll very much want to know why this happened. This is a common response, particularly at this time with the current market forecasts. Your affordability assessment would have been penalised because of the following:

The bank will assess your application by way of a sustained affordability test – assessing future economic factors as well as current ones. The main ones include interest rates and inflation.

Interest Rate Buffer

When assessing your affordability, the bank will often add an interest rate buffer to protect the consumer (you) from future interest rate hikes. They will look at the 12-month rate forecast from the South African Reserve Bank (SARB), top economists, as well as internal experts within the bank. Currently, banks are likely assessing your application at prime plus 25 – 50 basis points to incorporate potential near-future increases. This means that even if you were granted prime (currently at 9.75%), the bank will assess your affordability at 10 to 10.25%.

In addition, if you have more than one loan – for example, a car loan, credit cards or personal loan – the bank’s assessment will include rate hikes on all of your existing repayments. Therefore, if you have multiple contractual expenses, your application is likely to be penalised quite significantly. This can be deflating, particularly when your repayment history on your existing loans have been excellent.

Inflation

With interest rates rising, most consumer’s expenses will rise with them. The bank will apply a mark-up on your expenses to account for this – particularly around fuel (if you own a car), other forms of transport, groceries and utility costs.

It is also standard practice for the bank to go through the expenses you entered in your application and adjust any that don’t line up with your bank statements.

How can I get prequalified to know what I can afford?

Although frustrating, it is important to keep in mind that this assessment is made to protect the consumer from potential over-indebtedness and eventual default on one or more of your accounts. The banks have the best possible data, so if they tell you there’s an affordability risk in the future, you should take heed of that.

It’s also important to do a Prequalification for a home loan with a reputable bond originator, to know what loan amount is likely to be approved. At Phoenix Bonds, we will give you a conservative estimate by incorporating the most relevant economic factors for the current market. We can provide expert advice and support as we negotiate the best possible rate for you through our 10 banks. The best part – it’s totally free for you!

To complete a prequalification or apply direct through us, GET STARTED HERE.