Owing to a number of dynamics, the South African mortgage market still has lenders with 100 percent mortgage facilities, unlike on the global stage where cut-backs are the order of the day and lenders introduced restraints on mortgages i.e debt to earnings ratios, loan to value ratios.
A number of variables explain this state of affairs in the South African context, and this article will briefly discuss and put these into perspective.
First and foremost, affordability is central in mortgage applications and forms one of the prominent factors together with credit history. The National Credit Act 34 of 2005, introduced a concept known as reckless lending in Section 80, which is discouraged by the law as well as good business practice. This concept places an obligation on lenders to make an inquiry into the credit profile of the borrower as part of assessments on whether to approve credit or not.
If on the face it appears that the borrower is over indebted or will be over indebted if the loan is granted and therefore will certainly have problems repaying the debt, they ought to decline the application. However, in the event that evidence shows that after monthly essential living expenses are catered for, there is comfortable disposable income to honour the obligations towards the debt repayment, then the lender may well consider approving the loan subject to other set criteria.
Regular, stable and secure income forms part of the most critical requirements that lenders seek when assessing a home loan application. Borrowers with stable, permanent and more rewarding employment stand a better chance in terms of this aspect. It is inevitable that the economy may falter and suffer effects of depression, throwing thousands of people out of jobs in some instances.
Confronted by such a possibility, lenders will most likely favour granting home loans to people who can stand better chances of securing other employment if such a possibility manifests. Investec South Africa in 2018 argued that most of their clients are in such professions as medicine, law and accounting. For those in positions where income growth shows exponential potential, they were willing to go beyond the 100 percent LTP.
Further and most importantly, an extensive assessment and inquiry is made into the credit history and behaviour of the borrower, so as to guide the lender on the variables to forecast on such a loan. As alluded to above, this is an obligation of the law which the lenders must adhere to without choice and which protects their business interest at the same time.
Several judgments and adverse listings on the credit profile of a borrower are indicative of the future payment behaviour of the borrower and will most likely discourage the lender from approving a loan, let alone a 100 percent facility. In the event that the lender decides to take a chance on such a borrower, they usually do so with some safeguards in place such as the payment of a deposit and higher interests rates to recoup their potential loss on the account.
On the other hand, borrowers who present healthier credit profiles are in a position to score favourable terms on interests as well as the amount approved for the home loan facility.
Repo Rates as well as Prime Lending Rates are also important factors in this discussion. The Repo Rate of Interest (which currently stands at 3.5 percent) is the rate set by the Reserve Bank of South Africa, which commercial banks pay to borrow from the Reserve Bank to finance such things as credit facilities, while the Prime Lending rate (7 percent currently) is the yardstick from which the banks then fluctuate above or below in approving the Rate of Interest on an individual borrower’s home loan application depending on their financial circumstances.
The Prime Rate is essentially the Repo Rate with a mark up, and the latter proportionally influences the former. The Reserve Bank sets the Repo Rate according to market conditions in the economy, resulting in increased or reduced investments in such sectors such as property. With lower Repo and Prime Interest rates, an influx in home buyers is experienced due to favourable market conditions and the economy in general, which lowers even the risk of granting 100 percent home loan credit facilities.
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