4 things that determine how much a bank can give you to buy a house

Everyone dreams about owning their own house and even where that house should be. That is life. We are allowed to dream. But the reality is that the final determinant is how much money you can get to buy the house. If you had cash, you would not be reading this piece.

There are four major things that determine how much loan a bank can give you. These are:

• Your income - how much do you earn?
• The loan term - how soon do you want to repay your bond?
• The prime interest rate - what is the prevailing interest rate that your bank charges on your bond?
• The bank’s lending criteria- does your bank want a deposit or it can give you a 100 percent bond?

     

Your monthly income is the single biggest factor that determines how much you can borrow from a bank to buy property. Normally a bank will make sure that you do not spend more than 30 percent, or roughly one-third, of your monthly salary on your mortgage repayment.

It is better to work with one quarter, or 25 percent. When calculating how much you can borrow, banks also take into account other credit agreements that you have, such as if you have bought a car or furniture on credit and you have not paid up your account. The more unpaid accounts you have the less credit you will get.

If you are married you can buy property as a couple. This way you can combine your salaries and therefore qualify for a higher loan. But unless your salaries are too low, it is better to work with one salary and use the other for your upkeep or to buy other essentials like furniture or a car. But this will largely depend on how solid your marriage is and how much you trust each other.

    

Banks are governed by the National Credit Act which says that they must make sure that when they give someone a loan that the person can afford to repay the loan. If not they can be accused of “reckless lending”.

The term of your loan also determines how much you can borrow. You can get a bond for 10 years, 15 years, 20 years or even 30 years. The longer the period, the more you can borrow. The standard length is 20 years.

    

The interest rate also determines how much you can qualify for. The lower the interest rate the more you can borrow.

And lastly, the bank’s lending criteria also plays a part in the sense that if you do not pay a deposit, you actually have to buy a house that your income allows you to, but if you raise a deposit, you can buy a house with a higher value than the bank would lend you if you did not have a deposit..

    

The easiest way to find out how much you qualify for is to use online bond calculators. Every bank in South Africa that offers home loans has a bond calculator which tells you the size of loan you can get and how much your repayment would be when you feed in your gross monthly salary. Of course you should also know the prime interest rate and the repayment period.

    

We have found the calculator provided by Bondbusters to be much simpler to use. You can find it here: http://www.bondbusters.co.za/online-calculators/mortgage-installments.php

This was excerpted from Chapter 3 of our book: How to buy a house for half the price which you can buy here or here.