Conventional Mortgage Rate vs. Jibar Rate

Private Property South Africa
Denise Simpson

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

weeks.

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

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.

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