Home Loans: Are Banks Helping You or Themselves?

John Vaughan (Financial Advisor) @ Lucid Living

ABSA, the county’s largest retail bank, has announced that it will offer home loans of 110% of the value of the property, to households with a monthly income of up to R15142. A household earning R15142 per month would qualify for a home loan worth up to R450k, if no deposit is paid (allowing a maximum of 30% of the household’s monthly income to be spent on a bond).

ABSA’s Luthando Vutula (managing executive of ABSA Home Loans) expects more than 1,000 home loan applications per month, for the deposit-free home loan. According to Vutula, “the people we’re targeting here are … teachers, civil servants, nurses, and blue-collar workers”.

For Mandi Bester a primary school teacher in Alberton, this is great news. According to Mandi “in the past six months, we have applied to all the banks for a home loan and all of them turned us down”. “Some wanted a 30% deposit, who has that kind of money lying around, certainly not us” continues Mandi. An upbeat Mandi concludes “with this new offer, we are sure to qualify and get our home”.

Is ABSA’s move genuinely in the best interests of the consumer? Is this new offer a response to assist financially distressed consumers? ABSA’s slick public relations would certainly have you believe it is. However, scratch the glossy paint work and the rust is revealed or in this case, the real motivation for the new home loan offer.

Banks have been forced to respond to the steep 56,8% (year-on-year) decline in home loan lending. According to the National Credit Regulator’s Consumer Credit Report Q2 2009, mortgages declined more sharply than any other category of credit for the period under review – falling from R42,6 billion (Q2 2008) to 17,6 billion (Q2 2009).

As at Q2 2009, small home loans (between R0 – R150k) showed the greatest declined – in excess of 15% (quarter-on-quarter). The intermediate band (mortgage agreements between 150k – 350k and 350k – 700k) declined by between 6,6% and 7,4% respectively. Home loan agreements greater than R700k declined by only 5,8%.

In an attempt to stem the attrition, in late 2009 ABSA responded with the launch of a similar product for households earning up to R11,000. This offer was quickly replicated by the other large retail banks. The offer targeted the bank’s worst hit segment – small mortgages. ABSA’s latest offer, addresses its second worst performing segment – intermediate home loan agreements. In due course, the offer will roll out to extend to the 700k plus segment – the segment showing the lowest erosion.
Vutula said the extension of the scheme was a preliminary step before the 110% bond scheme was introduced into the higher income market before the end of the year.

“ABSA’s move signals a clear change in its credit policy, cautiously and progressively loosening the credit stranglehold” says Nico Prinsloo, a banking analyst.

It is clear that ABSA is executing a credit strategy that is in its best interests. It’s under pressure to lift earnings, after reporting a massive 25,5% fall in headline earnings for 2009. The real question then is: does the offer present any benefit for the consumer? In my view it does, but it comes with consequences.

Benefits of ABSA’s offer –

  • You will not be required to pay a deposit – as in Mandi’s case this requirement could be as much as 30% of the value of the home loan; and
  • The home loan facility will cover bond costs (about 4% of the total purchase price).

Consequences –

  • By not taking the traditional 30% deposit and granting a credit facility of 110%, the bank is increasing its risk exposure. The manner in which banks generally respond to higher risk is with higher prices. This will in all probability manifest itself through higher interest rates and compulsory insurance.
  • When entering into this transaction, pay specific attention to the costs and fees. You may find that the interest rate is higher than the standard and that you are required to maintain expensive credit insurance.