Since the implementation of the National Credit Act in June, “disposable income” has become part of the latest industry jargon. However, if you’re not au fait with how this is determined, you probably won’t be able to position your bond application in such a way that you qualify for the bond you require.
Property Finance Specialist, Tess Rodrigues of Property Factor, gives some insight into how your available disposable income is determined and what factors are taken into account.
She starts by warning that two of the major banks are only using the available disposable income to determine the size of bond you qualify for, while the other two are still using the repayment to income (RTI) of 30% in conjunction with the available disposable income.
· You require a bond of R1 million, your income is R28 000 and your available disposable income is R13 000 per month. The repayment on your bond will be R11715 at the current interest rate.
· At the two banks working with the RTI of 30% (i.e. R8 400) you will not qualify for a bond of R1 million, as the RTI needs to be in excess of R11 715.
· At the other two banks working with your available disposable income only, you will qualify for a bond.
Let’s look at another scenario:
· You require a bond of R1 million, your income is R36 000 (at 30% RTI = R10 800) and your available disposable income is now R8 000 per month. The bond repayment remains at R11 715.
· At the two banks working with the 30% RTI in conjunction with the available disposable income, you will not qualify for the bond, as your disposable income is not sufficient to service the bond.
· The same will apply to the banks working only with the available disposable income. Your application will be declined.
This means that the person with very little outstanding debt now qualifies for a considerably higher loan amount. At this point it is vital to be dealing with a good independent bond consultant who knows what is happening in the industry and is able to pitch your application to the correct financial institution.
How to determine your Available Disposable Income
List all your income earned from various sources. You must be able to prove all the income declared, be it in the form of salary slips, financial statements, contracts, cash remittance vouchers, deposits into your bank account etc. If you can’t prove it, you can’t use it. To determine your net income, deduct all your statutory deductions and employer reimbursements. For self-employed individuals, please don’t forget that you too are liable for PAYE or Provisional tax and this must be taken into account. Alternatively, the banks will deduct an arbitrary figure from your gross income.
These are loans / facilities / credit cards agreements that you, in your personal capacity, have entered into. Through ITC, the banks are able to retrieve a payment profile report. This report shows all your existing credit agreements, their limits, the balances outstanding, instalments due and payments in arrears. The total monthly instalments must be added to your monthly expenses. If you personally don’t declare your contractual obligations, two things will happen: 1) your application will appear dubious and 2) the banks just add your total monthly instalments to your declared expenses, potentially reducing your available disposable income.
Furthermore, the minute you accept a “quote” (another new term used for the final approval of your facility), the creditor is obliged to list the facility on your payment profile report, with the exception of a home loan, which will only happen on registration.
These are all other expenses that are either paid for in cash, by debit order, cheque or any other means other than through an agreed facility. For example, if you purchase your groceries with a credit card, don’t list this amount under groceries as well, just mention that it is paid by credit card. The same goes for your clothing accounts and telephone and cell phone contracts etc.
Don’t forget that when you acquire a new property, you must also make provision for additional expenses such as rates and taxes, levies, water and lights, insurance etc. If you are currently sharing a home and will be moving out on your own to the new property, you will incur additional expenses such as groceries, telephone etc, which were previously shared.
Take into account that if you want to incur further debt, you are going to have to service it one way or another. Where is this money going to come from? Are you going to reduce your other investments? Are you going to cut down on entertainment? Will you eat less? Only list what you are obligated to pay, not the higher amount you are paying or wish to pay. Avoid listing luxury expenses that you intend reducing. Don’t round off your figures to the nearest 100, but rather to the nearest 10.
At the current interest rate of 13%, for every R11.72 added to your expenses, your home loan qualifying amount reduces by R1 000.
Also bear in mind that if you utilise all your available disposable income to service the instalments on your new bond, you will not have additional income to enter into other credit agreements. So before you decided on the size of your home loan you wish to apply for, make sure that you won’t have to enter into future credit agreements, for example having to purchase a new vehicle.
This is not just about the credit providers having to play private investigator, it is also the responsibility of the consumer to budget and manage his debt accordingly. Under the New National Credit Act, the consumer has been granted protection against reckless credit lending. However, if you fail to fully and truthfully disclose your available disposable income, you must be prepared to forfeit this privilege.