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Plenty of surprises in store for new home buyers

02 July 2010 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

We learnt an interesting lesson this week. While browsing through the hundreds of emails in the FAnews inbox we stumbled upon a wonderful press release, titled Deposit useful when applying for a home loan. “What!” we exclaimed. Surely the benefit of havin

The release focused on the results of a recent survey conducted by PropertyGenie on behalf of ooba, one of South Africa’s top bond originators. Only 42% of poll respondents thought a 10% deposit was ‘reasonable’ while 27% believed a 100% bond was totally feasible. “Although it is possible to have your home loan application approved [without a deposit], it is less likely as the introduction of the National Credit Act (NCA) has resulted in more stringent lending criteria than was applied in the past,” says Craig Deats at ooba. He adds that the two major reasons for bond declines are having insufficient net disposable income to afford the bond repayments and a poor credit profile.

Big deposit is just the ticket

There are a number of pros to putting down a sizeable deposit when financing a home. A deposit reduces the loan amount and makes monthly repayments more affordable. If you purchase a house for R1 million without a deposit your monthly instalment – at 10% interest over 20 years – will be in the region of R9 650. A 20% deposit reduces the monthly outgoing to R7 720 – and creates savings of R263 212 in interest over the life of the bond. The act of saving for a deposit also demonstrates a level of financial discipline that stands the loan applicant in good stead.

More importantly a bond improves the debt to equity balance in the transaction. This is important to lending institutions because they use the underlying asset – your house – as surety for the loan. If they loan you 100% of the purchase price – and the housing market slumps – their surety is quickly worth less than the outstanding loan amount. The bank will lose a lot of money if you default on your mortgage repayment and they’re forced to repossess! Sub-prime – the mortgage phenomenon behind the recent global financial contagion – was caused in part by ‘negative equity’ in the US housing market. Reckless lending practices resulted in the majority of new homeowners owing more on their houses than they were worth. As house prices plummeted the financial instruments built on sub-prime mortgages collapsed too...

Residential myth busting

The experts say residential house prices are on the rise again. If you page through the latest Absa House Price Index you certainly get a sense the market is recovering strongly. Analysing the rand value per-transaction story creates an extremely positive picture. But when you assess the market on a volume basis your heart quickly sinks. Consider this simple snapshot of a small suburb in Centurion. An area report generated by Lightstone shows there were 118 housing units (full and sectional title) sold in 2004, 95 in 2005, 152 in 2006 and 95 in 2007. But the wheels have since fallen off, with 60 transaction in 2008, 39 in 2009 and only 26 year to date. Price aside, does this sound like a residential property market turnaround? Prices are rebounding slowly, but volumes remain appalling.

The latest credit data from the South African Reserve Bank points to soft volumes too. Jacques du Toit, economist at Absa Home Loans says the total value of outstanding mortgage balances at monetary institutions – including commercial and residential mortgage loans – increased by a mere 3.4% year-on-year, to R1021.4 billion in May 2010. But households’ outstanding mortgage balances were 4% lower in May, with a total outstanding value of R742.1 billion. In short, banks are extending less credit to potential homebuyers.

“The latest trends in household credit extension as well as household mortgage advances indicate that conditions with regard to household finances are still under pressure,” observes Du Toit. With the ratio of household debt to disposable income static at around 78.4% you shouldn’t hold your breath for an improvement in mortgage advances through 2010.

Editor’s thoughts: Part of the allure of buying residential property is the ‘gearing’ on offer when putting zero money down on a large asset. But a sizeable deposit – say 20% – needn’t dampen your enthusiasm for this form of investment. Would you put a 20% deposit on a new home, or do you prefer the 100% mortgage option? Add your comments below, or send them to gareth@fanews.co.za

Comments

Added by Genna, 12 Jul 2010
I would rather get a 100% access bond on a R1million home. Then make a deposit of R100,000 into the access bond in the same month. This way, if I ever need that money, I can get to it. If I pay a deposit upfront and get the bond on the balance I owe, I have no access to emergency cash.
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