Bank decline ratios on home loan applications expected to fall

Bank decline ratios on home loan applications expected to fall

With more than 40% of all home loan applications still being declined in December 2009, potential homeowners may still be finding it tough to obtain financing. However, the decline ratio is expected to fall as a result of the gradual improvement expected in the local property market in 2010.

Latest figures provided by ooba - South Africa's leading bond origination company, show that 42% of home loan applications were ultimately rejected by banks in December 2009.

According to Rhys Dyer, Chief Operating Officer of ooba, the current decline rates are well above the effective 20% decline ratio experienced during the heady days of 2003 to 2006, a time of strong property market conditions.

"These decline rates were, however, prior to the introduction of the National Credit Act (NCA). Our view is that the introduction of the NCA has influenced decline rates on a structural basis and it is unlikely that we will see decline rates at these historic lows again. There is however significant scope for improvement from current levels with property market recovery over the short term."

Dyer says lack of affordability still remains a key reason for high decline ratios.

"Affordability under the NCA is measured by net disposable income. Consumers need to show sufficient net income after tax, living expenses and the repayment of other debt to afford the bond repayment. With many consumers having been hit hard by the economic recession, and the increases in the cost of living they simply cannot meet these criteria.

"Many consumers are also recovering from an overhang of historic debt and a high percentage still have impaired credit records," says Dyer.

Dyer says that because every bank applies different credit criteria in assessing a home loan, it is essential that consumers shop around and don't merely accept the credit decision from only one institution. Almost a fifth of ooba's home loan applications that were declined by one lender in December 2009 were accepted by another lender.

"Further to the credit criteria, there is also the issue of pricing. Pricing between banks remains a key reason to shop around. The rates being offered to the same client may vary from bank to bank.

He says that in the current environment, using a reputable bond originator is a useful way to improve the chances of a successful home loan application.

"Bond originators can assist in shopping around to the different banks and ensure that all the required information is obtained and correctly reflected before submission of the home loan. As each bank has differing requirements in terms of their application information, bond originators have developed systems to ensure that once the information is obtained from the customer it is systematically formatted to meet each bank's application formats and requirements. This saves the consumer from having to go through a separate and time consuming application process with each bank."

Hello ooba news

When applying for a home loan, one of your most important considerations should be securing the lowest interest rate possible. And when the home loan is granted, you should do everything you can to reduce the term and the interest that you pay.

It came as some relief to homeowners when the prime interest rate was cut by 50 basis points to just 8.5% last month. Although this provides a welcome reduction in the monthly costs of repaying a mortgage, ooba, the South African home loan experts, say it would be wise for people to keep their repayment levels unchanged.

Despite the buyer's market in the property industry at the moment, in the wake of the global economic downturn, banks are still wary of granting 100% home loans. In light of this, if you're considering buying a home, it's a good idea to start saving up for a decent deposit.

If you're thinking about buying your first home, get your financial affairs in order as soon as possible. You need a clean credit record to secure a home loan. Unless you have a clean record of servicing debt, your bank will be unlikely to grant you a home loan.