There’s a vital factor that home buyers need to be aware of when they apply for a home loan, and that is the loan-to-value ratio.
So says Rudi Botha, CEO of BetterBond, who notes that this ratio - known in the home loan sector as the LTV – can make all the difference when banks are deciding whether to approve or refuse a loan application.
“The LTV is basically the requested loan amount expressed as a percentage of the purchase price – or as a percentage of the appraised value of the property, if this is different from the purchase price.”
For example, he says, if the property costs R2m and the buyer is putting down a R200 000 (10%) deposit, the loan required would be R1,8m, so the LTV would usually be 90%.
“However, if it turns out that the bank’s evaluation of the property’s value is only R1,9m, the loan of R1,8m would actually equate to an LTV of 95% as far as the bank is concerned, and that could actually result in the application being turned down.
“This once again underlines the advantage of saving up the biggest deposit possible before your next home purchase.”
The bigger the deposit and the lower the LTV percentage, the more attractive the loan from the lender's point of view, notes Botha, “because the more ‘skin in the game’ that prospective borrowers have, the lower the risk of them defaulting and the bank having to get a debt judgment and repossess the property.
“For this reason, most banks are prepared to negotiate lower interest rates on low LTV applications, especially if you apply through a reputable bondoriginator like BetterBond, which will approach all the banks to ensure that you get the best available home loan deal.
“And a lower interest rate means more affordable monthly repayments, plus big savings on the total cost of your home over the lifetime of the bond. On a R1,5m bond taken over 20 years, for example, an interest rate that is just 0,5% lower than the current prime rate of 10,25% will save you up to R120 000.”
In short, the lower the LTV that home buyers can achieve by paying a sizeable deposit (or if they are lucky by securing the property at a discount to market value), the more likely they are to have their home loan application approved, and the more favourable the terms will be.