Credit amnesty can make getting bond approval for a new home even harder
Taking out a bond to buy a home is usually considered 'good debt' - home bonds generally have lower interest rates than other debt and that interest is tax deductible.
But getting through the process of acquiring a bond can be tricky if you don't understand the details, and the sale could even fall through just before transfer if you've taken on more debt since your initial bond approval.
Even though bonds are long-term loans (30 years in many cases), those relatively low monthly payments allow you to keep the rest of your money free for investments and emergencies. The ideal situation would be t hat your home increases in market value over time, enough to cancel out the interest you've paid over that same period.
There are some common reasons why banks reject home loan applications that would-be buyers should be aware of.
Lew Geffen, chairman of Lew Geffen Sotheby's International Realty, says that affordability and a shortage of cashflow are probably the biggest reasons the banks will give when rejecting your application for a bond, as these clearly will have a bearing on your disposable income and ability to repay the new loan.
'Applicants' honesty at declaring their correct expenditure plays an important role in the process. It is also important to pay particular attention to how your banking conduct will be perceived by financial institutions as they vet you for a bond. If you regularly go over your overdraft limit or have rejected debit orders, this plays a big role in your risk profile.'
Most applicants are rejected because investigations by the banks and credit rating agencies into their financial standing show they do not earn enough, have not disclosed all their expenses or have unpaid debt and credit judgments.
Until recently judgments against potential borrowers and amounts written off as bad debts have traditionally been the two events that would put the chances of getting a bond at next to nil. However, Geffen says, in April the Department of Trade and Industry's regulations for the removal of adverse credit information came into force and all registered credit bureaus will have to comply with the credit amnesty by June 1.
'This basically means that all consumers with adverse credit information who have paid up their debt will be r e moved from the credit bureaus' lists of risky debtors.
Credit rating models which until now have been based on historical information are going to be less detailed, as this information will no longer be supplied by the bureaus to anybody who may want to make use of it in the course of a credit transaction or for any other reason.
'The result is that banks will be even more cautious when assessing risk. One of the mistakes buyers make so often is that they get initial approval on the bond, then they go out and buy new cars or other big-ticket items to go with their new houses.
'They don't realise that until the sale of the property is concluded, the bank can reassess its risk. And if your disposable income changes, so does your risk profile and banks can, and often do, rethink. Getting into more debt after putting in an offer for a house can be the kiss of death to your dream home.'