South African banks’ lending criteria remain strict such that many never get home loan finance, but borrowers are also warned to be responsible.
Purchases such as cars, clothing and electronics should be saved for rather than bought on credit where the high interest rate and the depreciation on the item do not add to your financial health and wealth.
This is according to Michael Bauer, managing director of IHPC.
Bauer explains that banks’ lending criteria might be overly strict and they have been known to be very selective in whose home loans they approve.
However, he says at Bardale Village, where IHPC have been marketing units for eight years now, applicants have been getting home loans, provided they have met all the lending criteria.
“Our clients at Bardale fall into the R350 000 to R750 000 price bracket, and are usually in the category where the banks would charge a risk premium of around 6 percent.”
He points out that there have been cases where 100 percent home loans were granted, but at an interest rate of 14 percent instead of the 8.5 percent prime lending rate.
“We have done an analysis which confirmed the average interest rate has been an 11.5 percent interest rate on the bonds granted to potential buyers at Bardale Village.”
Bauer says while he understands that full risk must be compensated for, it is his opinion that banks should not be charging high risk premiums as well as providing 90 percent loan–to-values (LTV) and having the collateral of the property if the owner should default on the mortgage repayment.
First-time homebuyers, find it particularly difficult in the present conditions to get home loans as they often do not have the credit profile necessary to check – because there is no debt, he says.
“It is a catch 22 situation if the only way to get credit is to owe money already in order to establish a payment profile.”
He says there is another problem in that banks often grant a 90 percent loan because they say that is the amount the applicant qualifies for, with a risk premium added, but then the personal loans department offers a loan for the difference.
“This, I feel, is bad lending practice and banks need to be careful of what they are exposing their clients to in terms of risk,” he says.
Bauer says while he understands that full risk must be compensated for, it is his opinion that banks should not be charging high risk premiums as well as providing 90 percent loan–to-values (LTV) and having the collateral of the property if the owner should default on the mortgage repayment.
Banks need to apply more logic in the way they lend to their clients.
Surely if the client is seen not to qualify for a 100 percent bond and is charged a risk premium, then they shouldn’t qualify for further debt in the form of a personal unsecured loan, he says.
When comparing banks in South Africa to those in Europe, banks there tend to want customers for life, so they generally sell the client a whole package rather than splitting the separate types of loans.
The market share there is a smaller percentage because there is strong competition (around 20 banks) whereas in South Africa there is less competition and banks here do not have to fight as strongly to keep their market share, he notes.
“My advice to those applying for bonds is to keep your accounts in order.
“Understand the reality of borrowing money and if you have a bad credit record make every effort to clear it,” he says.
Bauer says don’t borrow money unless you have to and only borrow for something that adds value as an asset, such as a property or investing in a business.
Purchases such as cars, clothing and electronics should be saved for rather than bought on credit where the high interest rate and the depreciation on the item do not add to your financial health and wealth.
“Start by living a lifestyle you can afford and prioritise the expenditure in your home.”
While there may be increased lending criteria, it is a two way street - banks are private companies and borrowers have a responsibility too to be good customers.
It usually takes up to three to six months to clean up a bad credit record and if you work hard at sorting that out it is not impossible to eventually own your own home.
He adds that it is always better to try and buy the property you live in earlier rather than later in life.
