Deposits still key for prospective Owners in bond application process

Although 100% home loans are being approved by banks in select cases, potential property owners are advised to save for mortgage deposits, due to the numerous economic benefits for prospective home owners in the long-term.

This is according to Morne Prinsloo, one of South Africa’s leading bond originators, who says that on average 36.5% of applications for 100% bonds were granted by the banks during March 2011. “This is in comparison to the 48.33% of bonds that were granted with a 10 – 20% deposit during the same period.”

Prinsloo says that deposits offer both long and short-term benefits for potential home buyers. “Although the current property cycle is seen as a buyer’s market with many good investment opportunities for potential home owners, the current economic climate has caused financial institutions to be risk averse with stringent credit criteria and lending policies. It is therefore more difficult for consumers to lending policies in this environment.”

He says that banks often look favourably at buyers with a deposit and will be more open to negotiate a competitive interest rate on a home loan, as a result of the reduced risk to the bank. “Besides improving your chances of getting your home loan approved, a bigger deposit could result in a more favourable bond rate that will save you in interest over the term of the loan. As a home loan is paid back over a long period, generally between 20 and 25 years, even a small deduction in the interest rate on your bond, can save you thousands of Rands in interest payments over time.”

He says that having a deposit available will also improve the buyer’s chance of securing the purchase and speeding the transaction up. “Properties on the market are currently taking longer to sell. A deposit will strengthen the buyer’s negotiating power with the seller because of the improved chance of securing finance.

“Some sellers are also more willing to accept an offer if the buyer has a deposit, as there is a higher likelihood that they will complete the sale.”

He says that consumers looking to purchase property in the future should be saving towards deposits by putting a certain amount away each month. “First time buyers are encouraged to start saving for a deposit as early in their working careers as possible. As time goes by, interest will accumulate and assist towards securing home loan finance. It is recommended that applicants should try and secure at least a 10% deposit towards the purchase of a property, but banks will however look at any deposit from 5% up as favourable.”

Prinsloo says that consumers that don’t have cash or immediate access to funds can investigate alternative sources such as personal loans or deposit guarantees – an insurance policy specifically designed to assist potential home buyers to secure a deposit.

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Property finance: NCA not only problem

The National Credit Act (NCA) has put a dampener on property buying and selling, but it is only one part of the bigger property financing problem.So says John Loos, property economist at FNB, who adds that he is doubtful that the NCA is the major brake on the housing market at present.

“I think that a lot of banks’ tight credit criteria has to do with the very risky period that we live in currently, and not merely because of a law that requires it. The reality is that there has been a lot of bad debt around which has hurt the home lending sector, the household sector’s financial condition following the recession is not healthy, and the world currently faces the risk of a double-dip recession, which would have a big impact on the household sector’s financial situation again were it to materialise.

“NCA or no NCA, the current economic times arguably make conservative lending policies suitable, and I doubt that much would change right now were the NCA to be instantly dropped. It isn’t as if the household sector has low levels of debt. To the contrary, the levels of indebtedness are generally high by historic standards.”

He says the NCA still has use in promoting responsible lending, “but it would probably have more of an impact on lending levels during good economic times when lenders instinctively want to be more aggressive”. “Currently the risky economic times mean that lenders don’t need much encouragement to be relatively conservative.”

“I think, though, that SA – along with some other Western countries – need to begin to look at something more troublesome than tight lending criteria, and that is our household sector’s high dependence on credit, especially credit for consumption purposes.”

Lew Geffen, chairman of Sotheby’s International Realty in SA, says the rich in SA’s property market are getting richer while the poor get poorer because of the way the NCA is being applied.

“The wealthiest homebuyers – or actually those considered most creditworthy by the banks – often don’t actually need bank finance, and so are able to upgrade and invest now at good prices which will enable them to gain maximum advantage from the next market upturn.

“But the lack of access to credit because of the way the banks are applying the NCA is shutting poorer buyers – or rather those with smaller cash reserves – out of the market and denying them the opportunity to build wealth through home ownership.

“In fact, the door has not just been closed on them, it has been slamlocked, and the worst affected are black buyers who can afford monthly bond repayments, but have not had time to build up extensive credit histories or asset bases that would make them better risks in the eyes of the banks.”

In 2007, he points out, at least 25% of home sales by his company were to newly-wealthy beneficiaries of BEE. “But after the introduction of the NCA in 2008, the percentage of black buyers in traditional suburbs dropped back to 15% and now we are back at 5% – which is where we were in 1994, just after the first democratic election.”

Geffen says that in previous property cycles, low property prices and relatively high rentals always signalled an upturn in the property market as tenants realised that they could afford the monthly bond repayments on a home of their own just as easily as the rent they were paying.

“But this is not happening this time around. Although there is enough demand to send the market back into a boom phase, the process is being blocked by the banks using the NCA to discriminate in borrower selection, and many people who could quite well afford to become homeowners are being forced to remain tenants.”

He hastens to say that he supports the idea of homebuyers having equity in their properties in the form of deposits, “but I also believe there should be one set of rules for everyone”. “At the moment some people are getting 100% bonds at lower interest rates while others are only able to get 70% bonds at higher interest rates.

“This is akin to the notorious redlining practices of the 1980s and 90s, the only difference being that the focus now is on keeping certain borrowers out of the lending picture rather than certain areas. And it is hardly what was intended when the NCA was introduced, which was essentially to protect consumers from unscrupulous lending practices.”

Loos says the problem in SA is not low levels of borrowing but, rather, high levels of borrowing and low levels of saving. “We don’t have nearly enough national saving to fund our huge fixed investment requirements, and household saving is definitely the weak link here (with government saving also being troublesomely low). And so, not surprisingly we have under investment in infrastructure, and the cracks are showing all over the place. And so, the savings shortage places huge constraints on SA’s long term economic growth potential, and thus its job creation potential.”

He says banks, by tightening up on lending in recent years, have merely unintentionally exposed SA’s weakness of low savings.

“By requiring deposits again on home loans, SA’s savings shortage has been highlighted by the many people who don’t have the cash on hand for the deposit required. Is the ultimate solution to lend more or somehow encourage more household saving? I think the latter would, in principle, be the real solution to the problem. I have to admit that the solution to the savings shortage is a complex one, and don’t have all the answers as to how this would be achieved, but merely making credit more available definitely isn’t the solution.” – Eugene Brink

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