The 'SILLY SEASON' is here - so WHY NOT BE SMART?

You are increasingly lucky if you are one of the few who still gets a bonus or 13th cheque in this tough economic environment.

Use your bonus wisely and you could be well on your way to getting that home of your own in the new year...

(This is a simplified explanation - if you want a in depth breakdown of how to calculate and improve your affordability you can download our Guide to Maximising your Affordability by clicking here).

The basics of how banks determine your affordability...

Banks limit the amount you can pay back on a home loan to ensure that you can afford to repay the loan - they have to do this in terms of the National Credit Act.

To do this they calculate the following three numbers:

1. 30% of your gross monthly income before deductions

2. 50% of your gross monthly income less your current contractual debt repayments; and

3. Your total take home pay less all your normal monthly expenses.

Then, they take the LOWEST of these numbers and that is the most they will qualify you to spend on your loan instalment each month.

So, let’s look at a simple example:

You earn a total basic monthly income before deductions of R27,000 and after deductions you take home R20,000.

You have the following monthly contractual debts:

• R4,500 instalment on a vehicle loan with R230,000 still outstanding
• R2,000 instalment on a personal loan with R45,000 outstanding
• R1,000 in a revolving credit card facility with R10,000 outstanding

In addition to your contractual debt repayments you have monthly expended of R5,000.

Doing the above calculations:

1. 30% of gross income = R27,000 x 0.3 = R8,100

2. 50% of gross income less contractual debt repayments = R13,500 - R7,500 = R6,000

3. Total take home pay less expenses = R20,000 - R7,500 - R5,000 = R7,500

In this scenario the maximum instalment that you will be able to make is R6,000 giving you an affordability of R 611 000.

Now lets be SMART...

As you can see, it is the bank’s contractual debt limit that is the problem. To solve this you will need to reduce your contractual debt - but how should you do this? In other words, which debt should you reduce?

If your objective is to improve affordability then you should pay off the debt that will reduce your monthly instalments the most.

If you use the R 10 000 to pay down your vehicle or personal loan debt it is unlikely that there will be any reduction in your monthly instalments - so rather pay down the revolving credit facility and limit your future use of this facility. This will reduce your monthly contractual debt repayments by R1,000.

Now calculation 2 becomes R13,500 - R6,500 = R 7,000 and your affordability for a home loan will be R713,000 - that’s a R102,000 improvement and it only cost you R10,000 to achieve that!!

How else can I improve my affordability?

This is just one way to improve your affordability before you go house hunting!

If you want help to determine your readiness for homeownership and more advice on how to improve your affordability we’ll assist you by doing your initial homebuyer readiness assessment for free.