Why South African Banks Prioritise 30% Income Threshold for Home Loans

Richard Gray, CEO of Harcourts South Africa, a leading real estate organisation, has consistently emphasised the importance of smart residential investment. Recalling an experience from his early career, Gray said, "Many years ago, after driving through the KwaZulu-Natal Midlands, I saw that there was great potential for residential development. I bought a piece of land, hung onto it for 18 months, and doubled my money"​​.

The 30% income threshold for home loans has been a common measure of loan affordability among South African banks, with institutions such as SA Homeloans stating that they will not approve a home loan if the repayments exceed this percentage of a borrower's single or joint gross monthly income​​.

Two critical factors in loan repayment are the amount borrowed and the repayment term, with most home loans requiring repayment, plus interest, over 20 to 30 years​​.

"Adherence to the 30% income guideline ensures that home buyers maintain a balanced financial portfolio, allowing room for other expenses and savings," said Gray. "This approach to lending aligns with Harcourts South Africa's commitment to fostering sustainable homeownership."

Banks also emphasise the importance of making additional payments into a home loan account every month, as this can significantly reduce the final cost of the home loan and decrease the payment period​​. 

Failure to meet loan repayments can lead to foreclosure or reposession, emphasising the importance of manageable loan repayments​.

"It's important to remember that when applying for a home loan, lenders will look at several factors to determine your eligibility," said Gray. "One of the most important is your loan affordability, which is based on what you earn compared to what your monthly loan repayments could be. In South Africa, it's generally considered that loan repayments should not be more than 30% of your single or joint gross monthly income​​.

"That being said, I understand that it can be a bit daunting to meet that 30% ratio. So, here are some tips to increase your chances of getting approved for a home loan:

1 Consult with a professional financial adviser and planner who can assist in formulating a personal finance plan. They can help you understand your financial position better and provide advice tailored to your specific circumstances.

2 Create a budget which includes a savings plan and stick to it. This will help you manage your money better and allow you to set aside funds for your future home.

3 Cut down on or cut out luxury and unnecessary expenses. Every rand saved can go towards your home loan repayments.

4 Compare prices. This will help you find the best value for items and services, allowing you to save more.

5 Whenever possible, pay cash rather than charging on credit. This will not only reduce your debt but also improve your credit score, which is another factor considered by lenders.

6 Review insurance policies and medical aids regularly to ensure you are getting the best deal available. You may be able to reduce your monthly payments and free up more income for your home loan repayments.

7 Go green - save on electricity and water costs by cutting down consumption. Not only is this good for the environment, but it can also help save money that can go towards your loan repayments​​.

"Remember, these changes might feel a bit restrictive at first, but they'll bring you a step closer to owning a home," said Gray. "And don't forget, any additional payments you can make into your home loan account can make a big difference. The interest on your bond is calculated daily, so paying extra money into your account, right from the start, can reduce the final cost of your home loan and decrease your payment period​​."