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No more home loans below prime?
08 Jul 2011
 Homeowners are unlikely to secure mortgage loans at below the prime lending rate according to Jan Kleynhans, chief executive of First National Bank’s Home Loan division who says that these loans are not sustainable and that rates on new loans are likely to increase.
Banks will no longer offer homeowners mortgage bonds at below prime as these are not sustainable for the banks in the current housing market.
He concedes that any rise in interest rates charged by banks will dampen the housing market, but says that the volume of applications made with the bank for mortgage finance has dropped from 30 000 a month at the peak of the property boom to just 10 000 a month currently.
He warns that average home loans will be about 0,75% above the prime lending rate. In 2006 the bank was offering loans at 1,6% below prime as demand for housing was high.
Kleynhans says that the increased cost of raising money for the banks, coupled with the liquidity requirements that are imposed on them, means that they have to charge rates that are higher than the prime lending rate.
Funeka Ntombela, head of home loans at Standard Bank says that loans will be linked to the risk profile of the bank’s clients and that there will be some differentiation between clients for the rates offered by Standard Bank.
She says that the banks make long-term loans, most often for a period of 20 years, but had to borrow money based on the cost of money now. She says that
Standard Bank is lending at a prime-plus rate right now.
Pat Lamont of Nedbank agrees that it is not sustainable for banks to continue lending money at rates below prime because of the increased costs of raising money and the liquidity requirements that will be introduced when the banking system must conform to the Basel 3 liquidity requirements.
Referring to financial stresses facing some homeowners, Kleynhans points out that by using FNB’s Quick Sell system sellers could use the low-cost mechanism to sell their property and avoid legal collections charges.
He says that if there is a shortfall on the outstanding bond on the house that has been sold under the Quick Sell system then FNB will fund the difference at a zero percent interest rate for a period of up to 10 years.
Readers' Comments
I think the title should’ve read “If this is not collusion, what is?”
Banks are crying about sustainability, but don’t take into account the end cost to their clients. The client at the end of the day pays back more than 2 times the actual loan value when considering interest and fees on long term loans.
On the other hand this could be a blessing for consumers, hopefully opening the window for more competitive loans companies who do not form part of the local cartel. - A. Jac
That is where competition between the banks and financial institutions comes in to play. For example at Mortgage Plus we negotiate a suitable interest rate for all our clients on their new home loan applications, if the one bank offers 0,75% above the prime lending rate the other banks will probably try to better that rate to secure new business on their books. That is why it is so critical to make use of a bond originator like Mortgage Plus who can negotiate on behalf of the potential homeowners “clients”
We need some competition between the banks! I feel if you "the Bank" want my business, you will have to compete for it! - M. Prinsloo
Thank you very much for the article guys. What I do not understand the measure in which banks uses to calculate rate + for first time home buyers is that, in most cases people who earns below R15 000, their interest rate is higher than the person who earns R20K plus. Logically, it is suppose that those who are not fat check earners be calculated a rate at least less that the person who affords. But what the banks does is that, those who are in middle classes or below, their interest rate is high which complicates repayment instalments for them, Some even be declined because of affordability on the interest rate of plus 3% above prime. - Luyanda
The Banks Borrow money at the Repo rate (5.5%) and Prime is at 9.0 % so all this talk about liquidity seems to be a smokescreen.
The property plus the borrower’s income is used as surety by the bank – The bank gets an asset and the homeowner a liability.
The real issue is that Banks have become VERY WARY of any form of Risk and hence are actually hurting as their growth, due to fewer loans being made, is under pressure.
If you can’t sell more then increase your margin – hence the real reason they are not happy with loans below prime. Although prime is a 63% return on the repo rate, not a bad return by any standard. - VB
Correct me if I am wrong but this sounds quite fishy and illogical.
South African banks in the private sector, like ABSA, Standard Bank, FNB and Nedbank, can borrow money from the South African Reserve Bank and the repo rate is then interest rate SARB charges the commercial banks for this privilege. In order to make a profit, the banks then lend out this money to their own clients, at a higher interest rate commonly called the prime rate. Some good reputable clients with good credit records, multiple product holding and reliable income streams have historically been offered rates as low as prime -2.25%.
The repo rate is currently at 5.5% and prime is generally accepted as 9%. It then logically follows that unless the commercial banks loan money out at prime – 3.5% they will still be making money off the transaction. I agree that there are other factors such as admin charges etc related to managing these loans but customers usually pay for these fees additionally on top of the interest charged on their loan. What utter nonsense is this then that banks are claiming to be loaning money at prime plus rates?? Who are they loaning it from? Why don’t they borrow from the SARB at the Repo rate as per the definition of Repo rate? Are there other costs in procuring this finance that we are not aware of? - R. Naudé
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