Sizeable home-loan deposits here to stay

If you are looking to buy a home, start saving now because the banks will want a 15% deposit for the foreseeable future.

Absa, which accounts for one of every three home loans in the country, says it will focus on home loans up to 85% of the value of the property. This means that potential home owners will have to have saved up to 15% of the value of the home as a deposit. Considering the average house price is now R700 000, one would have to have R100 000 in savings before you could buy an average home.

Despite a significant recovery in bad debts and an uptick in property prices this year, banks are now following a far more cautious lending strategy and are requiring people to put some of their own savings into their homes. Luthando Vutula, head of Absa Home Loans, says this strategy will help to increase the savings culture in South Africa as well as incentivise people not to default as they will stand to not only lose their homes but also their savings.

Historically, banks have always requested mortgage deposits. Up until 1997 the Reserve Bank stipulated that banks could only lend at prime up to 80% of the value of the property with a higher rate kicking in above 80%. The easy credit days which fuelled the property boom in the early 2000’s saw banks competing intensely for market share by cutting deposit requirements as well as interest rates. Those days are clearly over and it will take far longer for people to enter into the property market.

Property prices
This will effect property prices which although having shown signs of recovery, are likely to remain muted.

Absa economist Jacques du Toit says the 9% growth in property prices at the beginning of this year is unlikely to be repeated in the second half of the year due to the higher base prices as property prices had already started to recover by the second half of 2009.

This does not mean that property prices will weaken, just that they will not increase significantly and are more likely to keep track of inflation at about 6% to 7% for the rest of the year.

Forget rates well below prime
As the property market recovers and banks start lending it is unlikely we will see much competition in the interest-rate space. The cost of funding has increased substantially so banks are paying more for their money and passing that on to the borrower. But that does not mean you cannot negotiate a good rate. If you have a good credit record, borrow from your own bank and put down a sizeable deposit, you could negotiate a lower interest rate and even a 100% bond.

Absa confirmed that it is giving preferential rates and lower deposit requirements to customers who bank with them. Vutula says that lending to their own customer base is a key strategy as they are better able to assess the risk of these customers.

Lending increases
The good news is that home loans are being approved, albeit with large deposits. Although on average only about 50% of home-loan applications are being approved, Absa said their approval rate is closer to 70% as their value of loans approved increased by 28% in the first quarter of this year as the quality of applications has improved.

Alternative collateral
Lower and middle-income earners between R7 000 to R15 000 who struggle to save for a deposit can tap into alternative forms of collateral such as pension-backed home loans, insurance guarantees, as well as schemes offered by employers. If you fall into this category it is worth speaking to your bank about the various options.