SA banks, hard hit by large numbers of home loan defaults during the recent recession, are set for a much better time in the next few years because of the quality lending “books” they are building now.

That’s the word from one of South Africa’s leading mortgage originators, who says: “The home loan business the banks are writing now is probably the best they have written in the past 10 years, and we expect it to prove very profitable within the next two to three years.

“For a start, they are already evaluating or ‘credit scoring’ potential borrowers now on the basis of a one or two percentage point expected increase in interest rates next year. And while this may disappoint many, it should ensure that those who do obtain home loans now have the financial resilience to cope with the predicted rate hikes, without defaulting and running the risk of losing their homes.”

In addition, home loan rates are currently not being discounted nearly as much as during the past few years, when borrowers in good standing could quite often secure a rate that was one or even two percentage points below the prime rate.

“What is more, there is a further shield for both banks and borrowers in the fact that there are really very few 100% loans being granted at the moment. Combined with the strict lending provisions contained in the National Credit Act, the requirement now for most homebuyers to pay a deposit of at least 10% – and usually more – offers protection against the effects of negative equity for both individual borrowers and the real estate market in general.

“Consumers who pay bigger deposits also benefit in the sense that banks will grant them loans at more favourable interest rates, which saves them money.”

Finally, profitability should be improved by the fact that the banks have streamlined the acquisition of new home loan business as far as their fixed costs go.

“Overall, we see that the lenders have stopped playing so hard for market share and started to really concentrate on the quality of their home loan business. And as this shapes up, it should serve to make them much less nervous about the home loan market, and about granting new loans – although we anticipate that these will very much continue to be granted according to the ‘new rules’ and not in the freewheeling way of the past. Borrowers will be taken seriously, as valuable customers, and that’s good news.”

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

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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