Plan for Future Rates Increases When Buying a Home

The Reserve Bank’s decision to retain interest rates at the present levels is obviously welcome for home owners, but the long term prognosis is that rates will gradually rise and property stakeholders should plan accordingly.

So says Gerhard Kotzé, CEO of the ERA property group. His views are based, in part, on comments by the Director of Standard Bank Home Loans, Funeka Ntombela, who was the keynote speaker at the recent ERA South Africa 2010 awards ceremony.

Ntombela outlined to a rapt audience her prediction of a continued upturn in the property market. But at the same time she hinted at the likelihood of future increases in interest rates, due amongst other reasons, to South Africa’s future borrowing requirements.

Adds Kotzé: “The last property bubble was fed partly by low interest rates as well as by unfettered lending and the ‘securitisation’ or bundling of mortgage bond debt into dubious financial instruments, much of it being of low quality.

“Consumers played their part in that they acted in the belief that cheap money would remain available indefinitely. This proved not to be the case and while I am all in favour of low interest rates, I believe caution should always be the watchword.

“The banks themselves are setting the tone in this respect with their conservative lending policies of the moment, but home buyers and sellers should also play their part by borrowing conservatively.

“That implies the need either for increased deposits, if at all possible, when buying a home, thus reducing the size of the bond and the associated repayments or buying less expensively on the understanding that building up a stake in property is a gradual process.

“Fundamentally it’s about avoiding a repeat of the situation where, as a result of the credit crunch, interest rates soared by five or six percent and home owners were severely stretched financially.

“The joker in the pack right now is that in a rare show of collaboration, the trade union Cosatu and the business sector, are jointly campaigning for a weakening of the rand, which would imply the possibility of lower interest rates. But don’t hold your breath would be my advice!”

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Estate agents blame banks for lack of home loans

Estate agents are still struggling to secure loans for house buyers and say that in spite of banks offering 100 percent bonds, many financial institutions are not delivering on their promise.

Pat Acutt, the chairman of Acutts, said while the major banks offered 100 percent finance, the qualifying criteria were “very stringent”.

“You need to have a very, very good credit record to get a 100 percent loan. The banks have not relaxed their requirements in terms of the supporting documentation needed to access the application, and this on its own is making it difficult, especially for self-employed clients to qualify for a loan.” Acutt said the heavy reliance on credit checks jeopardised clients because in some cases information was outdated. “Gone are the days that the banks look at equity or net asset value, it is all about affordability.”

Dina Soukop from Soukops said banks were refusing too many applications, “in some cases A-list clients”. “Our experience has been that applications go through a certain process and if a box is not ticked then there is no human intervention and the bond is automatically rejected. That is why we prefer to use mortgage originators as we can at least talk to someone.”

Carol Reynolds, area principal for Pam Golding Properties Durban North, said the National Credit Act had proved an excellent buffer to the global credit crunch. “But legislation only comes alive via the manner in which it is interpreted and applied. There is a sense that the banks are adopting a very strict view, which is hampering the lending climate. “The spirit is one of caution and we are still seeing a high decline rate on our bond applications (about 50 percent). There is a lot of interrogation and inconsistency, which always calls underlying motives into question: are the banks operating from a strict risk-reduction mentality, or are they assessing each case on its merits?”

Mike Bennett from Proprop said: “I was told by a senior banker that banks would rather invest their money in China than risk it giving home loans in South Africa. The only reason they are staying in the business is so they don’t lose their clients to the opposition.”

Brenda Liversage, general manager of Maxprop Residential said: “Salaried clients are given preference. If you are self-employed we are putting 30 days on the contract to get the bond approved.” Chris Tyson, MD of Tysons, said about half of applications were being approved and bond applications were often evaluated by inexperienced bank employees.

Cheryl de Marigny, operations manager of Just Letting, said although red tape was onerous, “it is there for a reason… to prevent the banks from lending to clients who cannot afford this”. Grant Gavin, broker owner of ReMax Panache, said: “The red tape is very frustrating, with the worst cases still involving applications from self-employed clients… we are not seeing too many applications for 100 percent bonds being approved.”

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