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.”

Please contact us if you require any further information or would like to apply for finance:

Complete this short form online

011.327.4489 / 0861 1111 93

morne@mortgagepluscc.co.za

www.mortgagepluscc.co.za

Building Loans in South Africa

Definition:

A building loan is a loan granted to an applicant (borrower) for the purpose of erecting a building on a vacant stand. The building loan may include the purchase of the stand.

In some cases the applicant may already own a stand (i.e. It is already registered in his / her name) and the loan will only be required to erect the buildings.

After the bond has been registered the proceeds of a building loan are paid by means of progress payments, that is, the money is advanced in stages after completion of a certain portion or portions of the building.

Requirements when applying for a building loan:

1. Completed home loan application form

2. Supporting documentation (as required when applying for a home loan) i.e. Proof of income, proof of identity, bank statements etc

3. Land & building contract

4. A copy of at least the submitted building plans i.e. already submitted but not yet approved by the local authority

5. Schedule of finishes

6. Quotes / tender from the builder

7. NHBRC Registration certificate (Builder)

8. NHBRC Builders Enrolment Certificate (Property) – prior to registration

Rate & term options:

The interest rate applicable to a building loan during the building process is normally the prime variable rate plus a risk premium. Once all progress payments have been made, the client will then enjoy the rate the bank offers.

Retention:

Once the valuer does the valuation report, he will put on a full retention on the building portion of the loan & will thereafter make progress payments. The valuer may place a full retention on the loan, requiring certain documents e.g. NHBRC certificate or unit enrolment certificate.

Progress payment:

A progress payment is a payment authorized by the client and released by the valuer to pay the builder at certain stages of the building process. It protects the client against the builder walking away with all the money prior to completion of the building.

Progress payments are normally paid out at the following (minimum) stages:

• ? Foundation
• ? Roof level
• ? Finished project

(More progress payments can be done!)

Unique Costs:

• ? Drawing plans to be approved.
• ? Minimum fee for approving building plans.
• ? Local authority rates and taxes which must be paid during the building period – even if no one is living in the property after the purchase of the stand.

Interim Interest:

The bank will only pay out for work that is completed or materials actually used and will retain adequate money for completion. There are usually three or four progress payments to the builder prior to the completion of the house.

Interim Interest will be calculated on the loans daily balance that are made up of progress payments, any costs paid out as well as previously charged interim interest. It is important that the client budgets for this – if he does not pay the interim interest, there will be a shortfall at the end when the final payment is made. The customer should make part payment as soon as the first progress payment is made, to cover the interim interest. Provision must be made to cover the interim interest that can mount up during the building period. Failing this, the client will have to pay the shortfall when the last progress payment is made.

THE BUILDING LOANS PROCESS:

• ? The completed building loan application form, duly completed by the client, plus all the supporting documents (as mentioned above), have to be submitted to bank for consideration.
• ? If the building loan is granted, the bank will instruct the attorneys to register the mortgage bond, the costs of which are payable by the client.
• ? No payments will be made to the builder prior to registration of the mortgage bond.

THE OBLIGATIONS OF THE CLIENT ARE AS FOLLOWS:

• ? Inform the builder and the bank of any problems, concerns and delays.
• ? Sign progress payments only once the client is satisfied with the work done. At own expense clients can obtain expert advice if necessary – do not rely on the bank assessor only.
• ? Repay the building loan in monthly installments (Interest is charged at Prime Lending Rate on the Mortgage Bond from date of registration until final progress payment is paid out).
• ? Sign debit orders, stop orders or other payment instructions to pay the monthly installments – these can be processed to a current or savings account.
• ? Submit the electrical compliance certificate and the certificate of occupancy.

THE OBLIGATION OF THE BANK ARE AS FOLLOWS:

• ? Provide finance.
• ? Pay the builder on instruction of the client, but sufficient funds will be retained to complete construction.

? NB: The bank will always retain sufficient funds to complete the project irrespective of how much work has been done or the current value of the property.

THE OBLIGATIONS OF THE ASSESSOR ARE AS FOLLOWS:

• ? Assess the property using the plan, schedule of finishes, specifications and the building contract.
• ? Structure the retention amount and progress payments.
• ? Monitor the progress.
• ? The Assessor will always retain sufficient funds in order for the completion of the project.

THE OBLIGATIONS OF THE BUILDER ARE AS FOLLOWS:

• ? Conclude a building contract with the client.
• ? Build according to the contract and plans.
• ? Register with the NHBRC.
• ? Enroll the property being developed and pay the required enrolment fee. This fee may be included in the contract price.
• ? Provide all-risk policy until completion of the building.
• ? Provide waiver of lien – whereby the builder waives his rights to the property upon completion.

THE FUNCTIONS OF THE NHBRC ARE AS FOLLOWS:

• ? Register the builder.
• ? Issue the builder with an enrolment certificate.
• ? Ensure defects are made good.
• ? Investigate claims and complaints made in terms of structural defects.

WHAT ARE PROGRESS PAYMENTS? (Also known as draws or disbursements)

• ? Payments made by the bank, on instruction of the client, to the builder from time to time based on the progress of the building.
• ? Payments are only made on the client’s written request on the prescribed Request for Progress Payment form, signed by the client (all the mortgagors) personally.
• ? Clients are often requested to sign the above forms up front – this should never happen, as the client will not have control over the frequency of payments made to the builder!

IMPORTANT INFORMATION:

• ? The bank does not choose the builder. The building contract is between the client and the builder, and the bank is not a party thereto. The bank will not be liable for any act or omission by the builder, nor for any loss, defect or faulty construction work of any nature, or for any digression by the builder from the plans. Even if the assessor approved the work, the client remains liable to pay the full monthly installments.
• ? The assessor is representing the interests of the bank and the purpose of his inspections or assessments, is to determine whether there is building progress for the bank’s purposes and whether the property constitutes adequate security for the loan only and not to protect the interests of the client or to inspect and point out any defects of any nature whatsoever. The client is not to rely on the banks assessor when authorizing payment. The bank will not be held accountable if there is a value shortfall between the assessment amount and the client’s independent valuation, as the assessor is protecting the interests of bank. The Assessor will always retain (hold back) enough funds to complete the project.
• ? Interest is charged from the day the first progress payment is made and it is advisable to pay all this interest as soon as possible before the first installment is due to prevent any decrease in the retention amount and an increase of the interest due. Non-payment of this interest will reduce the amount available for building purposes (this normally becomes evident at the end of the project) and the client will have to obtain additional finance to pay the builder to complete the work if there is a shortfall.
• ? The bank cannot provide an electrical compliance certificate or certificate of occupancy and is further not obliged to provide these certificates.
• ? It will be in the client’s interest to visit the building site regularly to determine if the work is done according to the building contract, building plans and applicable legislation.

? All agreements and dealings between the client and the builder must be reduced to writing.

Please contact us if you require any further information or would like to apply for finance:

Complete this short form online

011.327.4489 / 0861 1111 93

morne@mortgagepluscc.co.za

www.mortgagepluscc.co.za