banks take a tougher line on home loans
19 May 2008

Absa, South Africa’s largest bank, has announced an increase in the deposit that potential homebuyers must pay when asking for a home loan.

Before 1999 all banks insisted that homebuyers contribute something as a deposit when buying a home. Previously this was a 20% deposit across the board. As the house market warmed up in the early part of the 21st century banks started to reduce the amount of the deposit required and eventually to offer 108% bond which included transfer and bond costs.

Although the banks had been warned by a number of leading Estate Agents, that this was an unhealthy lending policy and could lead to future financial difficulties by home owners they have allowed many lenders to take high percentage loans. Recent strong rises in interest rates has caused considerably affordability problems. With little or no financial involvement in their homes many homeowners with payment difficulties are feeling that they can simply give their homes back to the bank. While they may be tempted to do so, it would be an unwise move as it will affect their ability to obtain any finance in the future. They should rather consult their lenders and attempt to come to an equitable compromise whereby they continue to pay their loans at the old rate and accumulate unpaid interest until either rates drop or they are able to afford to pay the full instalment.

ABSA have now issued a confirmation that their credit policy is changing with immediate effect. In future costs will only be available for purchasers of Affordable Housing (less than R400 000 and with a total income for the applicant of less than R13,000 pm). They will continue to consider 100% loans on homes priced at R800 000 or less.

Properties between R800 000 and R2,7m will require a minimum of 5% deposit from the seller. Between R2,7m and R4m, will require a minimum of 10% and for over R4m a 20% deposit will be required. These changes take place with immediate effect.

I have been concerned for some time about these high percentage loans. Fortunately few of our clients have elected to take these types of bonds. It is important that buyers should buy within their means and that they should put down the biggest deposit they can together with the transfer and bond registration costs. While the government has eased the transfer duty on property it would help if the level at which no transfer duty was charged was increased say to R800 000 as this has become the level at which ordinary homes are sold.

Every incentive should be provided that encourages home owners to pay off their loans as soon as possible even before the 20 time period that is allowed. This could include escalating bond payments so that home owners effectively got ahead with their bond payments. This would mean that after a year or two it would be possible for individual home owners to absorb rates changes like those we have recently experienced without having to increase the amount they paid each month.

Mike Spencer
Platinum Global

www.rodneyhayter.com