Phew! I can’t believe we’re already 19 days into 2016! Now that we’ve caught our breath after the holidays I can finally take a few moments to look back at 2015 and De Mink Property Finance’s performance. Generally speaking, it was a tough year and many of the events that took place will echo into 2016 and beyond.
For example the root causes in the student unrest of October and November remain almost entirely unaddressed and it is not unreasonable to expect the currently dormant #feesmustfall movement to reawaken in February when students return to campus en masse for the start of the new academic year. Oh and President Zuma’s shuffling of Finance Ministers and the subsequent capital flight, Rand depreciation and outcry will also surely continue to weigh down an already underperforming economy that had already lost so much ground in the face of falling commodity prices.
Despite these and many other challenges De Mink Property Finance was able to make modest gains in both the number of bonds approved and the total value of those bonds and we were also able to reduce our operating costs. We are nowhere near where we would like to be (global domination! Mwahahaha!) and yet we are proud that we remain highly successful without compromising our service to our clients during these trying times.
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 95% of these purchases were made in the Cape Town City Metropole.
Top tips from 2015:
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!
BUT if you’re planning on buying a home and applying for a home loan keep your accounts at your current bank. Banks factor in the length and quality of a relationship with a client into their rate offers.
Average home price & average loan
The average purchase price of property was R1 642 412. This represents a 9% increase in the average purchase price from last year.
The average home loan granted was R1 156 073. This represents an 11% increase in home loan amount applied for and approved from last year.
What can we learn from this?
These increases reflects the continued inflation of property prices in South Africa generally and the Cape Metropole in particular. Inflation beating returns can and will still be achieved in the medium term but it will be increasingly dependent on the areas in which you invest.
Loan to Value (LTV)
On average the LTV (which is the percentage of the purchase price of the property granted as a loan) was 75.85% up from last year’s average LTV of 73%.
The LTV is still comparatively low when compared to 6 years ago as banks remain wary of 100% LTV loans (even to first time buyers). We would attribute the slight increase in the average LTV to the Banks’ increased appetite for mortgages. Home loans of 80% – 90% LTV remain the norm but the banks still price for risk and charge increased interest rates at this level.
What can we learn from this?
The increase, though modest, suggests that the banks were willing to consider higher LTVs and that this in turn suggests a modest increase in the risk appetite of the Big Four.
So, if you’re thinking about buying property, and need a home loan to do so, you be wise 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. This decrease in interest rate also increases the likelihood that you will qualify for the loan. When saving and planning do not forget about the costs associated with buying a property and securing a home loan (link here).
Now let’s see what info we can draw out of our data with regards to interest rates…
Prime lending and interest rate concessions:
The South African Reserve Bank (SARB) increased the repo-rate (repurchase rate) twice in 2015: by 0.25% in July and again by 0.25% in November. The SARB repo-rate currently stands at 6.25% 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 2015:
1st January until 23rd July:
When the prime lending rate was 9.25% the average concession received was 0.07% below prime. An average interest rate of 9.18%.
24th July until 19th November:
When the prime lending rate was 9.5% the average concession received was 0.22% below prime. An average interest rate of 9.28%.
20th November until 31st December:
When the prime lending rate was 9.75% the average concession received was 0.27% below prime. An average interest rate of 9.48%.
What can we learn from these figures?
When compared with last year the banks are, on average, offering more discounts on the interest rate they offer clients but at the same time these discounts seem to have a low ceiling. This means that more people were receiving discounts but those discounts were smaller. We feel this is further evidence of a slightly increased willingness to engage in home loans compared to the previous 5 years.
If this continues into 2016 it might make it the best year since 2008 to apply for a home loan.
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 2015 the majority of our clients, at 42%, again decided to accept offers from Standard Bank but this represents a 6 percentage point decline in market share from 2014. ABSA is down by 1 point to 25% of our accepted offers while FNB increased its share by 1 point to 22%. Nedbank reopened its books to non-Nedbank clients in 2015 in an effort to increase its share of the market generally and in doing so doubled its share of our business, to 8%, when compared to last year. Investec, as a boutique bank catering to select clients, took remaining sliver of our pie.
As with last year we find that most clients will receive the best rates from banks they have an active and established relationship (that is: a 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:
1) The client’s current bank will shock them with a terrible offer or by refusing to compete with the other banks.
2) 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
Nedbank’s re-entrance into the market came in the 4th quarter of 2015 and resulted in a not insignificant shift in our business. If this trend continues AND holds true across mortgage originators generally 2016 might see a significant improvement in competition and the discounts home loan applicants receive.
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 of next article will have our predictions for 2016. And as always if you have any questions or need any assistance please contact us!
We wish you a prosperous and happy 2016!