South African banks are granting more home loans with sweeteners

 ·16 Feb 2020

Finance minister Tito Mboweni is expected to have to make some tough calls to raise revenue and cut public sector expenditure when he delivers his Budget Speech on 26 February.

However, prospects for the real estate sector in 2020 are currently positive, said Tony Clarke, managing director of the Rawson Property Group. “Housing demand has definitely increased over the past year, especially at the lower end of the market, and we expect that trend to continue this year for several reasons.

“The first is that inflation has declined significantly and reduced some of the financial stress on consumers. Very slow house price growth over the past four years and low rental increases have contributed to this situation,” said Clarke.

“The rand has also proved to be quite resilient in recent months as investors once again favoured emerging markets, and if international oil prices now decline as expected, we expect to see inflation hold at below the midpoint of the Reserve Bank’s target range for most of 2020.”

Secondly, he said, the 0.25 percentage point decline in the repo and prime interest rates during January has reduced the monthly instalments on all sorts of debt from car repayments to credit-card balances, and increased the ability of many consumers to afford home loan repayments and thus to qualify for home loans.

“And at least one additional rate cut is on the cards this year, which should give the economy and the property market even more impetus.”

Rawson finance national admin hub manager, Leonard Kondowe, said that the third reason for optimism is the keen competition among the banks to grant new home loans, especially to clients with sturdy credit records. .

“At the moment, borrowers who have been prudent over the past few years are definitely the winners as the banks offer them loans with lower deposit requirements at the best interest rates we have seen in years.

For loans up to around R1.8 million, several banks are even offering loans that include costs for transfer and bond registration.

They can grant up to 105% loan to value (LTV). This can be a substantial amount. For example if you are purchasing a property for R1 million without a deposit, your estimated bond and transfer cost will be just over R57,000 therefore the extra 5% which you get granted with your bond equates to R50,000 which can be used towards these costs,” said Kondowe.

“This is enabling more first-time buyers to overcome one of their biggest hurdles, which is the need to save up a large amount of cash to cover transfer costs in addition to a deposit, and we expect such buyers to dominate the market in 2020 to an even greater degree than in 2019.

“For this reason, sales of lower priced homes and sectional title apartments and townhouses will be relatively brisk, while sellers in the higher priced areas and categories will in all likelihood have to wait longer and be even more willing to negotiate in order to achieve sales,” said Kondowe.

Meanwhile, Clarke said, the potential downgrade to junk investment status by Moody’s in March seems to have already been priced into the bond and equity markets, so it will probably not have as big a negative effect on the economy as previously feared.

“Nevertheless, the government is going to have to make some decisive moves to attract and keep more investment from private businesses and individuals so that it can begin to speed up economic growth at last – and hopefully make a meaningful dent in the unemployment rate,” said Clarke.

Clarke and Kondowe both agree that job growth will be the key to maintaining the current momentum in the market because without it, consumers will lose confidence to buy property, even if they can afford to do so. And in that sense this could prove to be a ‘make or break’ year for SA’s residential property sector.

According to FNB’s House Price Index (HPI), the bank expects broader economic developments, especially employment growth, to continue dictating the longer-term trends.

“Positively, demand for mortgages has shown mild signs of improvement across all price segments. At the same time, some sellers withdrew their properties on the market for resale amid unfavourable selling conditions. This has somewhat curtailed the pace of supply,” said FNB property economist Siphamandla Mkhwanazi.

In response to this lack of growth, Crispin Inglis, CEO of consumer-first digital estate agency PropertyFox, said the big banks are now far more open to granting 100% bonds to encourage buying and selling in the current environment.

100% bonds: the good and the not so good

Kevin Penwarden, CEO at SA Home Loans (SAHL) says competitiveness between the major lenders has led to a strong, consistent trend towards 100% bonds. “This means buyers who qualify can get a loan without paying a deposit. And for those who can afford a deposit, the amount of deposit required for a loan has decreased steadily and markedly.”

He said that while 100% bonds can be beneficial in the short term, they are not without their long-term risks.

“For SAHL, the need to lend responsibly remains our guiding light. In an economy where consumers are very stretched and increasingly vulnerable, we also pay close attention to whether our applicants can afford to pay back the loans over the long term. Of course, remaining competitive is important, but not at the cost of our clients being in a position to manage their loan.”

We are currently deep in a buyers’ market in South Africa, Inglis said. This means there are more houses for sale than there are suitable buyers looking for a home. “In this type of market, buyers have far more wiggle room when they negotiate.”

Inglis said that if a loan has no wiggle room, it can be very hard for the loaner to pay it back if, for example, interest rates are hiked or their financial circumstances change. “Unfortunately, 100% bonds do tend to come with higher interest rates and, with interest rate hikes at the discretion of the Reserve Bank, it is important that consumers enter into a home purchasing arrangement with their eyes wide open.”

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