Wow. What a year! Nationally we had two interest rate increases, a general election, multiple rolling black-outs, the end to the longest strike in South African history, a credit amnesty (not as scary as we thought), a few downgrades by credit agencies (VERY scary) and let’s not forget the the distraction of the Oscar Pistorius trial! Within our company we had a few tiny dramas too: one of our desktop computers literally burst into flames and the builder who worked on our office expansion disappeared before fixing the problems on our snag list. Yet through it all De Mink Property Finance continued to provide impeccable service and build on its excellent reputation and 2014 proved to be one of our most successful years.
What follows is a brief analysis of the data generated this year with a focus on the home loans used specifically to purchase properties (as oppose to further loans on bonded property, new loans on unbonded property or building loans) granted via the De Mink Property Finance channel. Please note that 90% of these purchases were made in the Cape Town City Metropole.
Top tips from this year:
- Save up for a deposit: your application is more likely to be approved if you contribute some of your own money
- Keep up a good credit history: maintain a good relationship with your bank and don’t forget to pay your debts (read more here)!
- Don’t always expect your current bank to be the best: competition is important and you’ll get the best deals if you shop around. This is true for home loans too!
Loan to Value (LTV):
- The average purchase price of property was R1 526 617
- The average home loan granted was R1 127 134
This means that on average the LTV (which is the percentage of the purchase price of the property granted as a loan) was 73.83%.
This LTV is comparatively low when compared to 6 years ago as banks are increasingly unlikely to give 100% LTV loans (even to first time buyers) and the days of 100% plus costs loans are over. Home loans of 80% – 90% LTV remain common place but banks will charge increased interest rates at this level.
What can we learn from this?
If you’re thinking about buying property, and need a home loan to do so, you need to start saving up for a deposit of at least 10% of the purchase price. As a general rule the more of your own money you contribute to the purchase the better the interest rate you will receive from the bank fronting the rest.
Speaking of interest rates, let’s see what info we can draw out of our data…
Prime lending and interest rate concessions:
The South African Reserve Bank (SARB) increased the repo-rate (repurchase rate) twice in 2014: by 0.5% at the end of January and by 0.25% in mid-July. The SARB repo-rate currently stands at 5.75% and is the most obvious tool the SARB has to exert influence (albeit indirect) over the economy and it represents the rate at which commercial banks repay their loans to the SARB. Despite these two increases credit remains relatively cheap in South Africa as compared to other emerging economies.
Unfortunately the banks (and other lenders) charge premiums on their loans and these premiums do not vary much from lender to lender thanks to the collusive banking environment in South Africa (effectively a textbook oligopoly). This premium is called the prime lending rate. Despite this collusion, different banks have different strategies and appetites for particular forms of risk and from time to time will offer ‘generous’ terms to certain clients who match their, at times, mystifying criteria. These ‘generous’ terms are called “rate concessions” and may be below or above the lending rate.
Now let’s take a look at what average concessions looked like in 2014:
1st January until 30th January:
When the prime lending rate was 8.5% the average concession received was 0.5% below prime. An average interest rate of 8%.
30th January until 17th July:
When the prime lending rate was 9% the average concession received was 0.1% above prime. An average interest rate of 9.1%.
17th July until 31st December:
When the prime lending rate was 9.25% the average concession received was 0.01% below prime. An average interest rate of 9.24%.
Best and worst rate concessions:
Best rate concession = 1.54% below prime from Nedbank for a purchase above R2 500 000 in Century City.
Worst rate concession = 1.71% above prime from FNB for a purchase below R600 000 in Salt River.
What can we learn from these figures?
The change in the average interest rate concessions over the year reflects the directly the perceived risk in the economy: the worst effects of the strike in the mining sector were being felt from January onward. When the strike ended and the effects (inflation, mining share drop-off) faded the concessions improved. The lack of a dramatic improvement speaks to the lingering doubts about the resilience of the South African economy.
With regards to best and worst rates: As you will see in the next section Nebank’s market share isn’t large. This is because they are VERY selective about their clients when compared to other non-specialized banks. But when they have someone they deem to be a low risk, high value client they will offer very favourable concessions. This is true of all the banks.
The reality is that, with the current private banking model, the wealthy executive or professional with a clean credit history, buying an expensive (though not absurdly priced) property in a good area is going to get a better deal than the young first time buyer, with no credit history looking for a cheap property in a less desirable neighbourhood. From the banks point of view the professional is a proven low risk and the first time buyer is an unknown quantity.
Unfortunately there is no quick way around this. But a solid tip for any young person hoping to buy a property in the future is to build and maintain a good credit history and relationship with your bank.
Banks Market Share from the De Mink Property Finance channel:
As mortgage originators we approach all possible banks on behalf of our clients, present their application in the best possible way and then encourage (fight with) the banks to give our clients the best possible deals. In the end it is up to the client to decide which bank they will choose to do business with.
In 2014 48% of our clients decided to accept offers from Standard Bank.
We find that most clients will receive the best rates from banks they have an active relationship (bank account) with and often they will remain with their current bank. When clients do decide to accept the offer of another bank it because of two reasons:
- The client’s current bank will shock them with a terrible offer or by refusing to compete with the other banks.
- The client’s current bank’s offer is delayed for so long that in order to secure the purchase of the property they must accept the offer of another bank
From our channel in 2014, despite generally negative economic outlook in South Africa, Standard Bank has consistently remained the most competitive bank and, though not without problems, was also the most efficient and helpful to our clients and our staff.
Happy New Year!
Property remains among the best long term investments available and a home loan is often the best way to break into the market.
We hope that this article and our blog have been of some help to you throughout this busy year. Be sure to check in again soon as our first article of next year will have our predictions for 2015. And as always if you have any questions or need any assistance please contact us!
We wish you a prosperous and happy 2015!