Buying a house is a massive financial investment and one that most people cannot afford on their own. This is why many South Africa’s take out a home loan to help them through the home buying process.
In our current economic climate, it has become increasingly difficult for potential home buyers to qualify for a home loan, let alone buy a house for cash. What do you do when you can’t afford a home loan on your own? Let’s take a closer look:
Qualifying Factors for A Home Loan
First and foremost, when you apply for a home loan, the bank will need to conduct an affordability assessment to determine what you can afford to repay on a monthly basis. This assessment looks at your monthly income and expenses.
Your income is calculated based on the amount you receive every month, usually in the form of a salary, but can vary if you earn commissions. Although you are likely to receive bonuses and other benefits during the year, those that you don’t receive monthly cannot be factored into the assessment.
Expenses tend to get a little trickier since most people drastically underestimate the true amount that they spend in a month that is, until they draw up a proper budget. Expenses assessed include living expenses credit expenses and other expenses that can be scaled down if necessary.
Based on your risk profile that is determined by this assessment, you will then qualify for a home loan and at what interest rate. Based on the value of the loan you require and your interest rate, the bank will calculate a monthly repayment. If you cannot afford the monthly instalment, you won’t be granted the loan.
What to do if you can’t afford a home loan on your own?
We all want to live in our dream home, but what if you can’t afford it? There are ways to go about this in order to afford the home loan for your dream home.
1. Save Up for a Deposit
The most sensible thing to do in this case is to find a home that you can afford and work at saving up a good deposit for a few years until you can afford that dream house.
A substantial deposit will bring down the cost of your monthly instalments as well as reduce the interest rate to make the loan more affordable. Although this option can take a long time, it is the best decision to make for your financial future.
2. Get a Co-Signer
Applying for a home loan with someone else, like a spouse, sibling or friend can help you out when it comes to getting a home loan. Since you would ideally be bringing two incomes into the household, you may be in a better standing to repay the loans.
By co-signing on the home loan, the responsibility is shared between the two parties. An alternative is to get a parent, sibling or friend that you trust to co-sign on your home loan. This does mean that if you can no longer afford the repayments, the responsibility defaults to your co-signer.
It is a massive risk for them to co-sign on your loan, so be sure to choose someone who not only trusts you but will be in contact with you for a long time (preferably for the length of the loan period).
3. Create a Budget
Draw up a detailed budget of your income and expenses to determine where you can minimise current expenses. You might not realise what all you are paying for each month that you could do without.
Reducing expenses can help your affordability assessment and possibly help you to afford the home loan. Just be sure to take into account annual interest rate hikes, since a 1% increase can increase your repayments by an average of R500.