Bonds hit as banks drop discount

10 Jun 2008

Hard-pressed consumers are major casualties as banks reduce discount on the prime lending rate on home loans.

The combination in South Africa of rising interest rates and tightening financial liquidity is creating a near "perfect storm" in the housing market, with hard-pressed consumers being the major casualty, says Simon Stockley, CEO of home loan provider Integer.

Stockley explains that it is becoming more expensive to raise capital in response to the global credit crunch, and as a result local banks have to pay more to attract more liquidity. "Now they want to pass the increased cost of sourcing cash to hard pressed South African customers.

These factors make the Governor of the Reserve Bank's recent announcement regarding increases to the repo rate "difficult to understand".

"At a time where central banks in other jurisdictions, like the UK and US, are proactively taking steps to support and stimulate the property sector, our regulator appears to be excessively preoccupied with inflation targeting at the expense of growth in the economy," says Stockley.

"The discounts to prime simply aren't there anymore. Banks are not going to be as aggressive about offering discounts as they may have been in the past. You are not going to be offered prime -2% in the current environment. Increasingly, we are seeing smaller and smaller discounts with the new maximum discount to clients, outside of the privately banked sector, at around prime minus 1.5%," he says.

While you may expect this to be the last of the consumer's woes, Absa and FNB have recently implemented changes to their credit policy that requires borrowers to have a deposit of at least 5% of the value of the property in order to secure a loan, making it even more difficult for new entrants without a deposit to gain a foothold on the property ladder.

Now, more than ever, it has become important for consumers to shop around and see if they can get a better deal, and it is imperative that consumers negotiate with lenders before ommitting to a home loan or re-finance option.

"Shopping around does work, and consumers should always seek professional advice when applying for a home loan. Because there is no real competition in the banking sector, banks have been able to exploit their dominance of the home loan market and offer customers the worst interest rate when they first apply for a home loan. It's only when you question and come back with a rival offer that the banks will generally match or reduce their rate. So, shop around for the best rate, and never accept the first rate a bank puts on the table," he says.

According to Stockley it is no longer simply a question of a better interest rate on your home loan, but a better deal that offers control over monthly repayments and allows you to be bond-free years sooner. I-Net Bridge

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Readers' Comments
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This is not the only problem, the banks have also, which has not been heavily advertised, now dropped the concept of 108% bonds. This has been the norm particularly for first-time home buyers in recent years. This now will make it much more difficult for homebuyers generally, not just first-time home buyers.

Worse than this is the following:

In past years before 108% bonds became available there was the practice of price loading where an extra amount would be added to the purchase price of the house and then an "Addendum", which was not submitted to the bank was added to the Contract of Sale so that the bonded amount would now have an "additional" amount which was paid behind the scenes by the transferring attorney to the purchaser in order to pay the costs.

This, apart from being against the Estate Agents "Code of Conduct" as legislated and therefore illegal, is obviously fraudulent to the bank in question as they are not actually bonding the actual amount being paid for the property. This was common practice amongst many estate agents and against which the EAAB took absolutely no action.

The worst part about this is that the banks were always aware of this practice and actively turned a blind eye. Even worse was the fact that the transferring attorneys were not only aware of it but actively administered it.

The action of the banks now is going to cause this whole saga to start again, but I do not hear anyone of them saying that they will actively prevent it from happening or alternatively the Law Society or the EAAB stating that there will be severe consequences for price loading.

The Banks will take a "holier than thou attititude" and the attorneys will pay their R2k fine. The banks are well aware of the consequences but are not willing to take any responsibility for their actions, they just want to look good to the Reserve Bank

I wonder what the reactions would actually be if you were to ask for definite statements outlawing the practice. I suspect that they would just say it is out of their control again. So much for social responsibility!!!! - Tony Penfold

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