In the bad old days before the National Credit Act getting a bond was easy. You could even get a 100 percent bond without too much trouble. Nowadays, a full bond is virtually unheard of.
Unless you can put down a deposit of between 10 and 30 percent of the price of the property you want, your chances of being granted a bond are close to zero.
“In this climate, every lender is careful and you have to have a deposit to buy.” This is according to Simon Stockley, the chief executive officer of Integer, a specialised home loan provider.
And while the market is tight and banks have stringent lending criteria, Stockley says that this shouldn’t deter you from buying. Quite the opposite. “Bad debts have risen and prices are falling. So now is a great time to get into the market. We’re pretty close to the bottom of the cycle and interest rates have definitely turned.”
But the bottom line is that if you want to buy property, you can’t do it without a good deposit. Not only will it secure you a bond, but the bigger the deposit, the better the interest rate you can negotiate. “If you have a sizeable deposit, you’re in powerful negotiating territory,” says Stockley.
So, how big an interest rate concession can you expect in this climate?
Unfortunately, the days of prime less two percent are long gone. “A few years ago prime less two was quite common, now you’re lucky if you get prime less a half a percent,” says Stockley.
According to one bond originator, prime less 0.4 percent is what most banks are offering at the moment. “If you can get prime less 1.2 percent, that’s a brilliant deal,” she says. “The other day, one of my clients was granted prime plus 0.2 percent because the loan amount was only R350 000 and it was a 90 percent bond.”
Several factors come into play when banks work out interest rate concessions. Gary Peterson of The Bond Man explains: “One of the factors is the rand value of the bond. A bond of R1 million will get a better rate than a bond of R400 000.
“A more important factor is the loan-to-value (LTV) ratio. The lower the LTV, the greater chance you have of securing a good rate concession. Banks like to see you committing as much of your own money as possible to the transaction, because this reduces their risk.”
Saul Geffen, the chief executive of ooba, says that risk is a big factor. The banks measure risk in various ways. They’ll look at your income and your credit record. If you (or your spouse/partner) have ever been blacklisted, it will obviously count heavily against you.
“Mortgage lending turns primarily on income, and on your ability to prove your income satisfactorily to the bank,” says Petersen. “This is easy for salaried employees, but not as straightforward for self-employed applicants. A letter of income from an accountant will no longer do, unless it’s accompanied by bank statements to substantiate personal earnings. Banks also now require a detailed schedule of your monthly expenses, to comply with the National Credit Act,” he says.
Assuming you’re squeaky clean, that too could count against you if it means you don’t have a credit history. The banks use your credit history to rate your behaviour as a client.
If you’re a first-time buyer, it’s worth getting a credit card at least six months before making your bond application, says Geffen. “Of course, you'll need to make sure that you pay off the balance in full each month, and on time, to avoid interest payments and to show that you’re diligent with managing your debt.”
Geffen says that to strengthen your chances of getting a good interest rate, you should use a reputable bond originator. “A reputable bond originator will also have solutions to any potential problems that you face in a tough credit environment,” he says. Ooba, for example, helps clients through the process of clearing any negative credit records.
This is one of the ways that bond originators are strengthening their value proposition in the current market.
Geffen says that some banks are seeking to reduce commissions to originators, “given the impact of the higher cost of funding and bad debts on bank margins”. Nevertheless, banks and home loan lenders depend heavily on bond originators as a source of business. He says that well over 70 percent of all new home loans are facilitated via originators.
“The banks recognize the strength of origination as a distribution mechanism and value for the banks in having outsourced their distribution on a variable cost basis.” The banks also value the service that bond originators offer consumers, “by allowing homebuyers to access a multi-bank offering to source the best deal”.
Geffen says that consumers have benefited from the bargaining power wielded by bond originators – at the expense of the banks margins. “Over the life of any home loan, the savings for consumers are real and significant. Originators have saved consumers billions over the term of their home loans. Before origination, many buyers received no discount to prime.”
Peterson also puts forward a compelling case for using a bond originator. “The greatest benefit is that you’re letting someone else do all the legwork and it doesn’t cost you a cent, he says.
“Mortgage originators receive an introductory commission from the banks, so there is no cost implication for you in using their services. Your own bank will seldom, if ever, volunteer their best deal without being put under pressure from their competitors.
“A good mortgage originator will shop around among various lenders, and will use rate offers from other banks to try to persuade your own bank to come to the party. I find increasingly that certain banks are not willing to match rate offers from their competitors, even if it means losing a client.”
Banks are playing hardball, and so too should you. Stockley says that buyers ought to be aggressive. “Lenders may not be that competitive. But with sellers under pressure, there is a buying opportunity. Take advantage and look for value.”
Be informed and prepared to negotiate, he says. “You’re entering into a 20-year contract, so shop around and don’t take the first offer. If you can squeeze a quarter of a percent on a 20-year bond, you’ll save yourself quite a bit of money.”