Home Mortgages

With interest rates seemingly on an upward cycle, the issue of fixing home loans in the market becomes a hot topic. However, fixing interest rates on your home loan requires a carefully laid out strategy and not a knee-jerk reaction to interest rate increases.

“Stress testing your budget is fairly simple and will give you a good idea where the breaking point is when it comes to interest rate hikes,” says Nel.

Banks do not fix home loan interest rates based on the current repo rate, but on the market interest rate curves which are constantly changing.

“The market interest rates are as dynamic as the share market, meaning that market interest rates rise and fall continuously as new information becomes available to market participants,” says Tommy Nel, Head of Credit at FNB Home Loans.

The rate at which a bank will fix also depends on the period of time the customer chooses, up to a maximum of five years.  There is a premium for raising funds for the longer periods of time, for example a fixed rate over 60 months will be higher than a fixed rate offered for 12 months.

The period of time as well as the expectation in the market for potential rate increases means that, on average, fixed rates will generally be somewhat more expensive than variable rate loans.

“Consumers should look at a fixed rate offering more like they would look at insurance products, such as buying protection or insurance against future hikes in the market,” says Nel. “I would also advocate against trying to time the market but rather work out your household exposure to rising interest rates.”

The best way to decide whether you should fix your home loan rate is to “stress test” your budget.

“Stress testing your budget is fairly simple and will give you a good idea where the breaking point is when it comes to interest rate hikes,” he says.

In order to do this you will need to plan your budget as normal, using bank statements rather than memory. Work in contingent expenses such as funds for a car, holiday expenses or any type of non-regular expenses.

“Once you have a solid budget, you will need to ascertain each expense that is affected by a repo rate increase,” says Nel. “These include home loan debt, car debt, overdraft interest and credit card debt.”

For example, if with a 1% or more increase in interest rates you will start to experience financial stress, fixing your interest rate at anything up to 1% above your current variable rate would have effectively helped you in significantly reducing the risk of losing your property.

Test how much your repayments would increase for every 1% increase in the prime rate of interest, he advises. All banks should have a loan repayment calculator which can help you. For credit card and overdraft debt you can take your average monthly balance or estimate and multiply this by 1%, 2% and so on.

“This will help you to develop a strategy on whether to consider fixed rates as you will soon see at what level of interest rate increase shortfalls begin to materialise in your budget,” says Nel.

“A key part of implementing this strategy is thinking about it in terms of risk management and a decision to protect yourself from losing your property,” says Nel. “There is always a possibility that some customers might end up paying a little more than what they would have on a variable rate loan, but it may well be worth it from a risk management and peace of mind perspective.”

In South Africa, at present, fixed rates are only available up to a maximum term of five years.

“One of the main reasons for this is probably the elevated levels of risks faced by banks in implementing risk management strategies to hedge fixed rate risk exposures, and the fact that these costs cannot be passed onto consumers like in other countries where fixed rates of much longer periods  are available,” says Nel.

Source: www.property24.com

Entrepreneurship is being taught in schools today and many parents encourage their children to start something of their own instead of applying for a job within a company.

When it comes to buying a home, however, the problem is that these entrepreneurs find it difficult to get a home loan.  This is according to Lanice Steward, managing director of Knight Frank Residential South Africa, who says a lot of young adults are finding it difficult to climb that corporate ladder and need to find a way to make it on their own. She says these entrepreneurs are feeding into the economy and are creating jobs and yet they are being penalised by the banks for their choices when they apply for home loans, which is an important part of being able to establish yourself and continue to grow as an adult.

Steward says it’s understandable that banks need to cover the risk; however, if the bond granted is not a 90 to 100 percent bond, then surely they should be protected by the value of the property?

“At a recent Standard Bank function, there was an indication that, of the properties going to auction, in the lower end price brackets, they are only recovering 45 percent of the value of the property and in the upper end only 65 percent of the value. This recovery at sales in execution is not high enough.”

Steward says the banks are responsible for the fact that the processes they have in place to recover the amounts on outstanding bonds is inept and corrupt. She says in certain areas, ‘white collar gangs’ are in cahoots with Sheriff’s of the court and have gone so far as to threaten young entrepreneurs just trying to buy homes to redo them and put them back on the market.

The banks should be acting in the client’s interest, and in the case of a sale of a distressed property they should be trying to recover as much as possible of the amount outstanding so that the original owner is not still liable for any amount on his bond. If they corrected their way of dealing with dispensing of properties from sales in execution, their risk factor would be lower and they then would not have to penalise high risk home buyers.

For an entrepreneur to apply for a home loan at present, the banks need two years’ worth of audited financial documents, which have to be signed off by an accountant as well as their latest tax return from the previous financial year end. They must also submit six months’ non-internet bank statements from their business and personal accounts and a letter from their accountant confirming income. The salary shown in the bank statements must tie up to the tax return figure and the company records must show that it is completely solvent and liquid.

According to Steward, in a recent case, a South African working offshore who owns his own business tried to apply for a bond. She says he was told that, firstly, he will only get 50 percent because he works offshore but to make matters worse, because he is an entrepreneur, he would not qualify for the bond.

“In South Africa, we’re trying to create jobs and many are forced to work for themselves. We should be encouraging them to stay in the country and settle, and employ people instead of making it difficult to establish themselves. South Africa’s private sector is responsible for well over 80 percent of the employment opportunities and it has to be fully appreciated how heavily South Africa relies on keeping them in the country.”

SOURCE: http://www.property24.com/