Interest rates on lower bracket properties at all-time high
100% mortgages for properties priced under R1 million are judged as carrying more risk and attract higher rates. If the buyer can put down a 'reasonable' deposit, this will reduce the rate charged.
However, says Mike van Alphen of Rawson Finance, there has been a growing demand for 100% bonds for properties priced under R1 million. These are subject to higher rates because the borrower's commitment is seen to be low.
By contrast, said van Alphen, someone buying a home worth, say, R2,5 million, but able to lay out a deposit of R700,000 could quite possibly get a rate of prime minus 1% - especially if he had most of his accounts with the same bank.
A whole range of factors, said van Alphen, could influence a bank's decision on a loan: the client's income source, his employment history, the sector of industry in which he works (some areas are known to fluctuate and alternate between high and low employment), the size of his deposit and the site of the property (any areas seen as going downhill or having a large number of distressed properties would be regarded as suspect by the banks).
"I believe that the banks on the whole are very fair in their assessments, but it has to be said that if they do have big question marks over the borrower these should not justify them in charging a prime plus 5% or 6% rate, which some banks have been charging recently."
Such ultra-high rates, said van Alphen, actually increase the risk of default because they are not really affordable to the buyer especially in an interest rate increase scenario.
Van Alphen added that, as the press have often alleged, buyers lack information on the whole subject of bonds and often do not fully comprehend the effect that a rising interest rate will have on their monthly payments. He did say, however, that the chances of a 5% or 6% increase in the bond rate in the foreseeable future are now small and he has himself repeatedly advised those sitting on the fence to get onto the property bandwagon now whilst prices and rates are at their current historic lows.
"I do feel, however, that the banks should have by now devised one or two special products for the affordable market. For example, they could charge either an initial very low rate or interest only repayments for the first two years and then structure the repayments in such a way that over a 20 to 30 year term, the rates are increased in line with inflation year-by-year. It might also be worth considering some system in which at the end of the repayment period a residual amount was still left owing. This is, of course, done with cars - where the car can be traded in for a new model - perhaps something similar could be arranged for housing, with the older bond payer now 'trading in' his home for a smaller, less expensive unit."
The real challenge facing everyone in the housing sector, added van Alphen, is to persuade the banks to award more bonds without becoming involved in greater risk. This, he believes, can only be done if the current, sometimes too stringent, criteria regarding minor bad debts are revised.
Rawson Finance Press Release