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How do banks asses the risks of lending home buyers money

How do banks asses the risks of lending home buyers money

Author: Pranil Maharaj
Date: 2018-07-13

The commercial banks are typically key players within residential property markets, through their provision of mortgage finance. This finance is the lubricant of the engine that keeps the system active and working.

The banks have become expert in managing the associated risks of being exposed to the residential mortgage market. FNB's recent report on the South African residential property market categorises the various risks as follows in its Housing Market Risk index:

1. Household debt service risk

2. Household sector savings risk

3. Disposable income windfall risk

4. Residential property speculative, over-exuberance and panic risk

5. Housing affordability risk

6. New building over-supply risk

The debt service risk attempts to look at the vulnerability of households and their ability to service future debt. This will no doubt be a key concern for any mortgage provider. It determines how vulnerable a household is to future economic shocks and interest rate increases.

Once you have earmarked a property, consider how easy it would be to add value to the home and at what cost this could be done. Some properties lend themselves to improvement while others may be a struggle, regardless of what is done to them. Look out for the value drivers outside of the property itself, such as location relative to amenities, traffic noise, views and impact of neighbouring properties. Any surrounding vacant land should be carefully assessed to determine the risk it could pose to the home you are considering, once that property is developed. Armed with your specialist area knowledge you will be well equipped to negotiate the most favourable outcome possible.