Johannesburg - After being banished to the financial product wilderness, the 100% homeloan is making a guarded comeback.
Absa this week announced that people earning less than R15 142 a month can now apply for loans of up to 110% of the value of the property, which will help clients fund transfer fees.
Since September last year, Standard Bank has been offering homeloans of up to 104% and First National Bank will give 100% homeloans "to creditworthy customers on an exceptional basis". Nedbank also gives 100% homeloans.
The return of these loans has been met with a huge demand, with statistics from the mortgage originator ooba showing that by December last year, 44% of homeloan applications were for 100% mortgages.
However, banks are not scrambling to grant these loans and approval rates have been fairly limited - and with half of the approved applications, the banks still required some kind of deposit.
Local banks - like many banks worldwide - got burnt by 100% loans during the credit crunch.
While the easy availability of these loans to people who could not afford deposits helped inflate property booms, many home owners were left devastated after the crash.
The value of their properties was worth less than their 100% home loans, which will run up huge interest charges during the course of the loans. Many defaulted on their loans.
Some countries, like the UK and Canada, are currently contemplating banning 100% home loans altogether.
Jan Kleynhans, CEO of FNB Homeloans, said the decision to grant "high-risk" customers these loans has hit both the customer and the lender during the recession.
Absa has so far refused to give 100% homeloans to households earning more than R15 142 a month. Luthando Vutula, managing executive of Absa Home Loans, said the biggest consideration in this regard is the risk of negative equity (when the property is worth less than the loan).
Lasath Punyadeera, director of homeloans products at Standard Bank, does not believe 100% loans will return to pre-credit crunch levels.
"Factors such as the increased cost of funding and increased cost of capital (which were not a serious concern prior to the credit crunch) have become more prevalent in the era post the credit crunch."
Currently, Standard Bank will only grant 104% loans to selected first-time home buyers and affordable housing buyers depending on the loan amount, "business imperatives" and risk factors.
Means vs opportunity
Pre-2008, any potential home buyer could qualify for 108% home loans - provided that they could afford the repayments and meet the bank's lending criteria.
While Adrian Goslett, CEO of RE/MAX of Southern Africa, isn't in favour of a return "to the crazy years when we had to fight off the banks as opposed to fighting with banks", he does think 100% home loans have a role to play.
Many South Africans simply do not have 10% or more to deposit just to initiate the investment.
And if you want to buy a property of more than R2m, some banks will require a 20% deposit while for vacant land, most banks ask 40%.
The advice to prospective home owners may be to wait, build up some capital first and only then to enter the market, said Goslett.
"The problem is the opportunity exists now. Property prices and interest rates are at a low and won't remain there indefinitely."
Taking up a 100% bond also allows first-time buyers, who don't have cash to fund a deposit, to use their income to pay off their own property instead of paying rent.
"By doing this they have access to long-term capital growth on their property at a younger age and should (theoretically) be debt-free at a younger age," said Tian Barnard, a financial planner with Consolidated Financial Planning.
However, 100% home loans have major drawbacks. Your interest payment on the loan will be significant.
Borrowers also need to be extra careful of not over-extending themselves to the point that if interest rates do increase or some unexpected situation does occur that they have no buffer to rely on, said Punyadeera.
You will have to afford repayments should the interest rate increase by at least two percentage points, said Goslett.
"This is a real possibility as most economists are predicting an increase in these numbers by early 2011."
If you have taken a 100% bond, you won't be in a position to increase your bond should you need to do so due to unforeseen circumstances. You may find yourself with your back against the wall if you cannot afford to cover the monthly expenses, said Barnard.
"This is the reason why I recommend that if you accept a 100% bond you should ensure that you have a lump sum that you can pay into you access bond that can serve as an emergency fund. This will serve as a buffer against unpleasant surprises. It is also a good idea to pay extra money into your bond to build up a reserve fund even more."
Alternative options
Currently, 100% home loans are primarily offered in the lower end of the market.
Absa's MyHome initiative, which will extend 110% loans, is mainly aimed at people with steady jobs, like teachers and members of the police.
For those who won't qualify for a 100% home loan and don't have money to fund a deposit, there are other options like ceding your pension savings or another type of investment to the bank, Vutula said.
Borrowing from the bank of Mom and Dad or buying a property with somebody else may also be considered.
But in the end, many prospective home owners will have to demonstrate some strict financial self-discipline, and partake in that least popular South African pastime: saving.
- Fin24.com