Home loans up as banks relax lending rules

At the height of the property boom in 2006, South Africa’s four major banks were approving an average of more than 30 000 new home loans every quarter.

During 2009 this number had dropped to well below 8 000 as banks tightened lending criteria considerably in response to the global financial crisis, as well as factors such as interest rate increases, high household debt ratios and the effect of the National Credit Act.

However, with sharp cuts in the repo rate over the past couple of years, the prime lending rate has dropped to below its 2006 level and, according to property analysts, all indications are that banks have been slowly relaxing their lending criteria again. The result is that the number of new home loans approved is on an upward trend again, having increased by 10 percent since 2009.

Mortgage Plus recently completed a study of the number of home loans approved per quarter and loan-tovalue ratios of the four major banks – Absa, Standard Bank, FNB and Nedbank – from 2006 to the first quarter of 2011, to assess whether the strict lending criteria applied over the past few years since the economic crisis have eased.

“There is a slow and cautious recovery and there has been a slight drop in the first quarter of 2011, with fears of a double dip recession being mooted. But an upward trend in new lending for the residential market indicates that banks are developing more of a desire for risk,” says analysts .

“Boosting indications that lending criteria have relaxed is the fact the loan-to-value (LTV) ratios are on a similar upward trend. After dropping from an average for all banks and all market segments of almost 90 percent in 2006 to just 79 percent in 2009, they have climbed back up to an average of 82 percent since the first quarter of 2010.”

She says there is a significant difference in LTVs, however, once these are assessed in terms of market segment. Poorer households are accessing home loans of over 90 percent LTV whereas the LTVs for the comfortably off and super-wealthy are around 80 percent and 75 percent respectively.

“A number of factors account for this trend. The first is affordability – it is often simply the case that comfortable and wealthier buyers have cash to put down deposits and have often sold previous homes at a profit, whereas those buying in poorer areas may not have savings or the profits from the sale of a home to invest.

“However, it should also be considered that much of the bad debt on the banks’ books after the downturn in property values and rising interest rates caused many homeowners to default, came from the wealthier sector and higher-priced homes. Also, there has been pressure on the banks to contribute towards South Africa’s low-cost housing backlog by making home loans more accessible to lower income earners.

“There has been comment from the property sector that the strict lending criteria are a major factor constraining house price growth, and that in light of low interest rates this approach may be too conservative – creating something of a buyer’s market,” says Ivins.

However, she says, there is clearly light at the end of the tunnel.

“Interest rates are low, home loan accounts are performing better and lending criteria should become more lenient, which should stimulate prices and demand as household debt comes under control and banks resolve the distressed property sales and properties in possession still on their books.”

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Before applying for a home loan you need to make sure you are properly prepared and have your expenses under control.

To improve your chances of being approved for a home loan, you should try not to take on any other big debts in the six months before you apply.

This is the advice of Hano Jacobs, CEO of the Realty 1 International Property Group. “Banks don’t like to see too many recent requests for credit clearance on your record, so this is not the time to buy a new car or furniture on a hire purchase agreement.”

“In fact, you might even think twice at this stage about taking out a new cell phone contract or applying for a new store card,” he says.

Home buyers should also do their best not to change jobs while in the process of applying for a home loan. “Lenders look for employment stability, so if your reason for moving house is to take up a new position, you will need confirmation of this from your new employer to accompany your home loan application, in addition to your salary records from your current job,” says Jacobs.

He warns that home buyers should not try to conceal anything in their financial past from the lender. “If you have borrowed the cash to pay the deposit and will have to repay it, say so. If you have had credit problems in the past, admit to these too.

“Today’s sophisticated credit checking systems will inevitably reveal the whole story, and once lenders find you have been less than truthful about one thing, they will naturally start to question the rest of your home loan application and once that happens, the chances are very good that it will be declined.”

Two further pieces of advice for home buyers, he says, are not to go on a spending spree for a new home if their home loan application is approved, and not to proceed with an application if a change in their circumstances means they will not be able to afford the repayments.

Some additional expense on a new home is to be expected, says Jacobs, but buyers should resist the temptation to splash out and deplete their cash resources at least until they have taken transfer and established the actual running costs of their new home.

“And if something should happen that makes a big change to your financial picture, such as a disabling accident or a retrenchment, for example, it is not a good idea to proceed with an application in the hope of securing the loan before the bank finds out what has happened,” says Jacobs.

He advises that if there is a good chance you will not be able to repay the debt, you should rather withdraw the application – and keep your credit record intact.

Mortgage Plus offers a wide range of advice on different bond options and further advice on the above. Please call us for further information on:

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