100% Home Loans

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 help.

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 retrenched
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.