Still the most popular form of home loan in South Africa.
But, do they put you in control or in the street?
Why are 100% home loans so common and so popular in South Africa?The
reason is simply that most prospective homeowners just do not
have the necessary capital to put down a reasonable deposit. Very
often they have adequate monthly income to repay a mortgage loan
but cannot save any part of their monthly disposable income. Their
potential mortgage instalment is presently being paid as rent
on the property they are occupying. Relatively high taxes and
general living expenses have made it hard for the average South
African to put away money for the future. In this country only
1% of all monthly income goes towards savings while it reaches
up to 25% in countries like the United States. It is not uncommon
there to find estate agencies requiring buyers to put down up
to $20 000 as deposits before they show them the properties on
the market. It is hard to imagine the day in South Africa when
this will happen!
Qualifying the Buyer – The Bank’s Risk Factor
South African banks have become increasingly reluctant to grant
100% loans. They have lost millions of rands in recent years as
a result of thousands of foreclosures against defaulting home
owners. Many of them will wait until the bond is at least three
months in arrears before taking action but this has not helped
much. So many of their borrowers have capitulated and
abandoned their mortgage repayments completely. The vast majority
of these defaulters have been from the 100% loan category. Too
often the client does not really feel that he owns his property
as he has put no investment into it and has no equity in its value.
He feels as though he is only renting it and, like any tenant,
will sense no loss if he walks away from it. Nonetheless a huge
percentage of loan applications are for 100% bonds. What is needed
to secure one? Firstly your bank will want to be sure that you
can really afford to repay it. The required monthly instalment
will be compared with your income and, if it exceeds 25% of it,
your loan will almost certainly be declined. If you are married
and both of you are working the bank will take both salaries into
consideration. Some evidence of stability will help – the length
of time you have been employed at the same company, the prospects
of promotion, etc. These will all be taken into account. Your
bank may require another family member to sign as surety to give
it greater security. Government and other subsidies will also
Read the Early Warning Signs!
Shortly before the Second World War the British military developed
the radar, a vital tracking-device that helped it considerably
to win the Battle of Britain. They called it an early-warning
system. Homeowners also need one to prevent them falling into
sinkholes, especially with substantial mortgage loans registered
against their properties. Most people long to own their own homes.
It is very often too easy, however, to become a homeowner with
a 100% loan. You will do yourself a huge favour by giving some
careful thought to the problems that could occur in the long run.
At present mortgage rates are relatively low – it is not often
that they are pegged at 14.5%, the current base rate. Don’t be
tempted to buy the most expensive property you can presently afford.
Less than a year ago rates were well over 20% – how will you cope
with oppressive monthly repayments that may chew up over 35% of
your monthly income? At present you will be well advised to buy
well within your means and use the opportunity to reduce your
capital debt on your loan by paying more than you have to. Secondly,
if you do manage to pay off part of your bond and it is an
access loan, avoid the temptation to access it again, especially
for a non-essential luxury such as an overseas holiday. Once you
have done this it will become very easy in the future to do it
again and again and you’ll never have any real value in your property.
Most importantly, don’t think you can skip the odd instalment
without anyone noticing. A foreclosure can be a soul-destroying
experience. It’s not funny being literally kicked out of your
own home. With a major default judgment you will also find it
extremely difficult to get any kind of
credit in future. Get that bond of yours paid off!
What Can be Done to Improve the System?
In the modern computer age it should be possible to make mortgage
repayments more flexible and introduce incentives to pay off 100%
loans. Here are a few really good suggestions – are any home loan
general managers listening out there?
1 Interest Reduction Incentive
With first-time homebuyers it seems an incentive is needed to
encourage them to pay off their loans and to regularly pay their
monthly i n s t a l m e n t s . Most banks will
give a 1% reduction to their preferential clients, usually people
with plenty of money who can comfortably reduce their bonds. Why
should only the rich be considered reliable customers? Why not
grant the same concession to borrowers at the lower end of the
scale who also faithfully repay their loans? A package deal can
be introduced whereby first-time buyers of properties including
those requiring 100% loans are offered a 1% reduction to be credited
retrospectively. The conditions are that the client signs a debit
order against his salary, pays his first thirty-six instalments
every month, and agrees to a further 15% being added to each instalment
to reduce the capital at the same time. Three years later the
1% reduction can be worked back into his interest debits since
the beginning of the loan. He will have a double benefit – a sizeable
capital reduction and a large interest rebate.
2 Reducing the Access Maximum to 80%
On all flexible bonds the maximum amount homeowners may access
should be reduced to 80% of the value of the property. This will
stop them consistently borrowing up to 100% and having no material
interest in the property. Banks who allow this practice have only
themselves to blame if they consistently burn their fingers.
3 Creating a Temporary Repayment Cushion
Far too often homeowners genuinely intend to repay their loans
but become over-whelmed
by unforeseen circumstances. A provision should be made for a
portion of the loan already paid off to be accessed for monthly
instalments until the storm passes. Many homeowners are suddenly
and their packages often can’t tide them over the months of unemployment
that follow. Life Assurance companies build surrender values into
their policies. Once they have real value the client can either
surrender the policy for this value or it can be used to cover
the monthly premiums while it lasts. Something like this
should be introduced to mortgage bonds – the retrenched borrower
should be allowed to use any credit under
80% of the loan to pay his instalments in the meantime. The debit
should be done automatically each month and he must be prevented
from accessing any further amounts in the meantime. The same applies
to periods of sudden high interest rates – the extra amount required
over the previous instalment should be made available to the client
to pay the extra interest on the same terms.
We need a nation of proud homeowners, not depressed defaulters.
In countries like Singapore laws have been introduced requiring
all school-leavers to pay, say, 10% of their salaries from the
day they start working into property funds. Once they have accumulated
enough to put down a 20% deposit on a home they are entitled to
withdraw their investment. When they sell their homes, however,
the initial investment or the same percentage of the resale price
may only be used as a deposit on another home. Don’t we need something
like this in South Africa? Many more similar improvements can
be introduced to make the system more borrower-friendly – some
flexibility and good sense is all that is required.
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