CONVENTIONAL MORTGAGE RATE VERSUS JIBAR RATE
Historically, the majority of home loan finance in South Africa has been
provided by the major 4 retail banks, but over the past few years new players
have entered the mortgage lending market. Home buyers now have more choices of
who to use to finance the property they have chosen to purchase. The competition
is good for the market and the healthy margins enjoyed by the banks are a thing
of the past.
The major retail banks use a prime-based rate when establishing interest rates
for consumers seeking mortgage finance. Prime is the individual bank's lending
rate, and this rate is in turn influenced by the REPO rate.
The REPO rate is set by the South African Reserve Bank, and is used by the
Reserve Bank to regulate consumer spending and to ensure that inflation is kept
in check. When there is an increase or a decrease in interest rates, it is the
result of the Reserve Bank adjusting this REPO rate. The REPO rate also sets the
rate at which the banks can borrow wholesale funds from the South African
Reserve Bank. Prime is therefore a managed rate or a discretionary rate
determined by the bank, but always influenced by changes in the REPO rate.
The non-traditional lenders that have entered into the mortgage lending market
do their sums very differently and raise capital to lend to home buyers by the
method of securitisation. Put simply, they originate a bundle of home loans and
sell them off to an investor who is looking for a reliable long-term investment.
They calculate their rates using the 'Jibar'. The Jibar is an independent
market-derived rate for terms of one, three, six and 12 month money market
deposits determined by the ten major South African financial institutions, and
is released by the South African Futures Exchange.
Both the REPO rate and the Jibar have been consistent for many years and they
move either up or down in concert. The Jibar rate is reviewed quarterly while
the REPO rate is decided by the Reserve bank in meetings, which happen every six
The non-traditional home loan or 'securitised home loan', does have some
advantages especially for smaller value home loans where the rates can be far
more attractive. In some cases, a conventional home loan from a retail bank
could even be more than the prime rate. It is for this reason that this form of
home loan is gaining popularity and has a definite place in the market. What the
home buyer must understand is that the interest rate is reviewed quarterly, on
both new and existing loans, so the rate quoted when you purchased the property
may not be so competitive a year down the road and will definitely vary from
time to time.
Access facilities are also available on both conventional and securitised
products, but with 'securitisation' it is not client activated any re-advances
or withdrawals from the loan have to be applied for. This makes the conventional
banks access facilities far more convenient and you can access your funds from
your bond account by simply logging onto your bank's website, visiting a local
branch or even using an ATM.
Fixing your rate
In uncertain times like the present when rates seem to have moved into an upward
cycle, buyers like to take advantage of a fixed rate to reduce the risk of
spiraling house repayments. Both conventional and securitised home loan products
do offer the facility to fix, and the securitised product does provide for a
rate fixed over the entire period of the bond. The rate, however, is high and is
dependant on the risk associated to both the client and the equity that the
buyer has in the property. The conventional home loan products only offer fixed
rates of 12, 18 and 24 months, but the fixed rate is considerably lower than the
20 year securitised product. Like the Securitised product, this rate is
invariably higher than the prevailing bond rate at the time.
While the rate quoted by the 'securitisation' lender may seem much lower than
the prime rate of your retail bank, it is important to understand that all the
commercial banks offer discounted rates on prime. This rate depends on many
factors and not all clients will enjoy the same discount.
As mentioned in previous articles, rate should not be the only consideration
when shopping for a home loan - the parcel of products and services provided by
your bank also needs to be considered.