Blogs
What's New Trending
How banks decide what you can afford
A bank decides what you can afford by comparing what comes in each month with what already goes out, then checking how reliably you have repaid credit in the past. The law requires it to make this check before it lends. The result is the most the bank will lend you, which is not always the amount that is comfortable for you.
Why banks have to check
Under the National Credit Act, a lender must take reasonable steps to assess your situation before granting credit. It must look at your understanding of the risks and costs, your repayment history, your finances and your existing debts. Lending to someone who clearly cannot afford the loan is called reckless credit, and the Act prohibits it.
So the questions a bank asks are not just red tape. They protect you as well as the lender.
What the bank looks at
Your income
The bank starts with your gross and net income, and checks them against your payslips and bank statements. Salaries are straightforward. Other income needs more proof. Commission, bonuses and overtime are often counted only in part, or only if they have been steady over a period. Self-employed applicants usually need to show financial statements and tax records.
Your monthly spending
Banks look at your regular expenses as shown on your bank statements, such as groceries, transport, school fees, insurance and utilities. Many also use set allowances for living costs. This means two people with the same salary can be offered different loan amounts.
Your debts
Existing instalments reduce what you can borrow. These include vehicle finance, personal loans, credit cards, store accounts and any maintenance you pay. Even a credit card with a high limit that you rarely use may count against you, so close accounts you do not need before you apply.
Your credit record
Your credit report shows how you have handled credit. Late payments, defaults and judgments count against you. A clean record may help you qualify and may give you a better interest rate. Read how to improve your credit record before applying.
The property and your deposit
The bank also values the property, because it is the security for the loan. A larger deposit lowers the loan amount and the bank’s risk. See how much deposit to buy a house.
Why the answer differs between banks
Each bank sets its own rules about how much weight to give each of these. One bank may count part of your commission, and another may ignore it. One may use a stricter allowance for living costs. The rules are not published as one standard, and they change over time. So a refusal at one bank does not mean every bank will refuse. A bond originator can send your application to several banks at once. See what a bond originator does.
Test your own budget first
The bank’s maximum is a ceiling. Your own comfortable amount is usually lower. A home costs more than the bond instalment alone. You also pay rates and taxes, levies in sectional title, insurance, maintenance and utilities. Our guide on monthly costs of owning a home lists them.
- Write down your take-home pay after tax.
- List every fixed monthly commitment you already have.
- List your normal living costs, based on the last three months of statements.
- Estimate the extra home costs listed above.
- Subtract. What remains is the room you have for a bond instalment, and you should leave a margin for rising interest rates.
Then try the affordability calculator and the bond repayment calculator. To see what a change in the interest rate would do to your instalment, use the interest rate change calculator.
Ways to improve your position
- Pay off or reduce small debts, especially cards and store accounts.
- Save a larger deposit.
- Avoid new credit in the months before you apply.
- Check your credit report for mistakes, and ask the bureau to correct them.
- Apply together with someone else only if you both understand that you will each be liable. See buying property with a partner.
- Consider a cheaper property, or a longer bond term. Compare them in 20-year or 30-year bond.
What to do next
Do the budget exercise above, then ask a bank for a pre-approval so you know where you stand. Our guide to home loan pre-approval explains the process. When you have a figure, search properties at a price that leaves room in your monthly budget.
This article is general information for South African readers, not legal, financial or tax advice. Rules and rates change, so check your own situation with an attorney, your bank or a tax practitioner. Our property calculators can help you work out the numbers.