Paying the Price of a 100 percent Loan

Private Property South Africa
Lea Jacobs

Although everyone celebrates when a drop in the interest rate is announced, not everyone, it seems, is benefiting from the decrease. In a recent report released by Rawson Properties, it was revealed that some banks are charging way more than the prime rate set by the Reserve Bank. Sadly, it seems that it is those investing in the lower end of the market and who are truly at the mercy of the banks that are most affected as it appears that the inflated rates are aimed at properties priced between R400 000 and R700 000.

There are instances where buyers of properties in this price bracket are being charged as much as six percent above prime and it is pretty certain that these buyers are unaware of the implications that an inflated bond repayment figure is going to have in the long term.

Bill Rawson, the chairman of Rawson Properties and his financial colleague, Mike van Alphen, describe the interest rates charged by some banks as 'totally unjustifiable' and 'out of all proportion'.

"Never before in the history of South Africa have banks worked on such flagrantly exaggerated mark-ups. A six percent over prime interest rate in South Africa equates to a 70 percent mark-up," said Rawson.

Although the banks are quick to point out how many 100 percent bonds are currently being granted, it would seem that some of these bonds come at a price, and that that price is incredibly high.

"The amount of deposit a client is putting into the purchase certainly has a bearing on the rate being charged," says Van Alphen. "We are finding that more 100 percent bonds are being required in the under R1-million purchase price bracket and hence higher interest rates are being charged. The size of the bond rather than the purchase has a bearing on the interest rate. A purchaser buying a property for R2.5-m and only needing a bond of R1,8-million for example, could get a rate of prime minus 1,0 percent, especially if the client has most of his accounts with the bank."

Asked why he believed that some banks were charging higher interest rates, Van Alphen said: "The banks assess their risk and price accordingly. They would look at the client's source of income, employment history, employment industry, the amount of deposit, where the property is situated - if they have a high number of arrear or distressed properties in the area."

While it is understandable that banks are business entities and are answerable to their shareholders, one has to wonder how the banks are able to justify these exorbitant rates.

"The risk needs to be assessed. However, a rate of prime plus 6 percent is just not on as the higher the rate, the less affordable the bond becomes for the client."

It has been widely reported that most of those who are granted 100 percent bonds are first time buyers who, to a large extent, have little or no grasp of the future financial effects an inflated bond repayment figure brings and the true cost of owning their first home.

If, as Rawson says, a six percent above prime figure equates to a 70 percent mark-up, this means that the buyer is in effect paying almost double for his property. One has to ask why, in a country where a large group of people was previously barred from owning property, this has been allowed to happen. Another point that banks should make clear to homeowners who are being charged more is what happens when the interest rate starts to rise. Will the banks then reassess the situation and amend their rates or will the homeowners be forced to pay both the higher interest rate as well as being penalised by the inflated bond rate?

Different banks have different policies and not all are charging higher interest rates. It is highly recommended that all buyers, in all price brackets, shop around and get the best deal available.

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