You'll pay more for those 100% home loans
But putting down a bigger deposit will achieve huge savings on interest costs, writes LEIGH ROBERTS
Existing home loans will also be affected but there is a five-year phasing in period.
If you are a public servant, however, you need not worry. The ruling will not apply to you because the state is presumed to guarantee your debt.
The ruling, imposed by the Reserve Bank, requires commercial banks to hold a higher capital reserve on mortgage bonds that exceed 80% of the property value.
The effect of this is an increase in a bank's lending cost - and this extra cost will surely be passed on to customers. The new ruling could notch another 0.5% to a bondholder's interest rate on excessive loans from October - an extra R78 a month on a R200 000 bond over 20 years at current interest rate levels.
Christo Wiese, registrar of banks, says the new ruling aims to make banks more prudent in their mortgage lending and to price a mortgage bond more in line with its risk.
Wiese is referring to the explosive growth in 100% home loans over the past five years. These loans pose a greater risk to banks - from falling house prices and from homeowners who are more likely to desert homes in which they have no equity.
The ruling brings SA into line with international banking practice. In Germany, for instance, penalty interest is imposed after a 75% loan to value ratio.
The big banks canvassed this week were not ready to give definite details on how they will handle the new ruling. But they say it is unlikely that they will stop granting 100% loans as they are too entrenched in the market.
One way to handle the new ruling is a system of multiple interest rates: a rate for loans below 80% of the property value, and other rates for say 80%, 90% and 100% bonds.
Alternately, the banks could go for a tiered interest rate system: the standard interest rate will apply to the portion of the bond below 80%, and a penalty rate to the excess portion.
The least likely option for a bank is to simply absorb the extra cost.
A question that is perplexing the banks is how to deal with the ongoing valuation of a property. For instance, an 85% loan on a property today may have fallen to a level below 80% in five years as the value of the property rises (and the repayments make a small dent to the capital).
Of even more concern is when the value of a property falls below the original price - which is a distinct possibility in some parts of Gauteng.
Wiese says the Reserve Bank will not prescribe to the banks how to revalue property.
"We will only check on the procedures for the revaluation process, and refer to the bank's internal audit function," he says.
Banks already revalue properties on a regular basis; the most common method is an index applied to geographical areas. Yet, as one banker points out, an index method is too broad a measure to give an accurate value for individual properties.
Another issue concerning the banks is the five-year phasing in period for existing loans. But again, Wiese says the Reserve Bank is not going to prescribe how the banks deal with this.
What is the effect on new homebuyers?
You can still get a 100% home loan, but you will pay more. And the ruling encourages you to save for a bigger deposit on your new home.
Professor Karl Posel, author of several books on the mathematics of mortgage bonds, says promoting higher deposits is not necessarily bad - and makes sound financial sense.
First, it encourages you not to go beyond your means when buying a new home.
Second, when you have bought a home within your financial means the monthly repayments will not overstretch your monthly budget.
"The ruling will encourage people to cut their financial coat according to their cloth," Posel says.
Surely the greatest benefit of putting down a higher deposit on your home is your huge saving in interest paid over the bond term.
For example, on a R200 000 housing bond over 20 years at 22% interest (the current base rate), the monthly repayment on a 100% loan is R3 717.
For a 75% bond, after paying a 25% deposit of R50 000, the monthly repayment is R2 788. The difference in monthly repayments is R929. Over the 20-year term of the bond, this translates into an interest saving of a massive R222 960.
So the Reserve Bank ruling may prompt you to delay buying a new home until you have saved enough for the cash deposit, but in the long term it is medicine worth taking (if you don't it will cost you more each month).