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Johannesburg – A home loan or mortgage bond is still arguably the cheapest‚ most flexible way of borrowing money‚ Ewald Kellerman head of sales‚ FNB Home Loans said on Monday.
“A home loan does not just enable a person to buy a property‚ but can be a very useful debt instrument or even interest savings mechanism that stretches far beyond an initial property transaction," said Kellerman.
However, he said that consumers do not always realise the power that a home loan holds and may often be discouraged by the relative long term of the repayment period.
The South African Reserve Bank last week reported that a breakdown of the various credit categories showed a structural change in the composition of credit since the 2008–09 recession.
Mortgage advances became less attractive for banks because of the higher risk of default and high levels of non-performing loans; increased regulatory capital requirements; low margins for banks on long-term mortgage loans; and an overhang of housing inventory.
A lacklustre property market‚ strict affordability criteria and large deposit requirements for aspirant home buyers further dampened demand for mortgage advances.
The shorter maturities and better scope in pricing unsecured loans‚ among other considerations‚ contributed to banks progressively promoting general loans to households.
The contribution of mortgage advances to overall growth in total loans and advances waned from 2009 onwards and‚ as a consequence‚ its share of the outstanding balance of total loans and advances shrank from 53.9% in 2009 to 47.5% in 2012.
“It may seem that there is little incentive to accelerate the minimum repayment‚ because one initially sees so little visible benefit in terms of a reduction in the capital amount outstanding.
"However‚ changes in the repayment value in the early stages of repayment of the loan could significantly affect the total cost of the transaction. Small changes in the way a home loan is managed can make a significant difference down the line‚” Kellerman said.
He explained that a typical home loan’s interest is calculated daily and capitalised monthly.
This means that daily fluctuations in balances changes the amount of interest being added to the loan‚ and can incentivise the borrower to pay additional funds into the account as early as possible.
This is in contrast to an instalment sale loan where interest is often capitalised upfront‚ and a fixed amount paid off over a term.
"Flexibond facilities or their respective counterparts at other banks allow easy access to your home loan," said Kellerman.
This mechanism allows easy access to any prepaid (or surplus) funds that have been deposited above the required instalment. Home loans are typically provided at lower interest rates than short-term debt.
The interest rate is directly linked to the risk related to the borrower. In the case of a home loan‚ this borrower risk is reduced by the security that an immovable property offers to back the loan‚ he said.
FNB calculations showed that depositing 10% of the purchase price upfront without reducing the repayment can decrease the time it takes to repay the entire loan by four years and three months.
The FNB house price index showed a 2.6% year on year (y/y) increase for February after a revised 3.9% y/y gain in January.
“The current financially pressured household sector environment necessitates that consumers start understanding how to optimise their debt structures to work towards financial wellbeing. The home loan can be a key debt instrument in assisting with such debt management improvements‚” added Kellerman.
“A home loan does not just enable a person to buy a property‚ but can be a very useful debt instrument or even interest savings mechanism that stretches far beyond an initial property transaction," said Kellerman.
However, he said that consumers do not always realise the power that a home loan holds and may often be discouraged by the relative long term of the repayment period.
The South African Reserve Bank last week reported that a breakdown of the various credit categories showed a structural change in the composition of credit since the 2008–09 recession.
Mortgage advances became less attractive for banks because of the higher risk of default and high levels of non-performing loans; increased regulatory capital requirements; low margins for banks on long-term mortgage loans; and an overhang of housing inventory.
A lacklustre property market‚ strict affordability criteria and large deposit requirements for aspirant home buyers further dampened demand for mortgage advances.
The shorter maturities and better scope in pricing unsecured loans‚ among other considerations‚ contributed to banks progressively promoting general loans to households.
The contribution of mortgage advances to overall growth in total loans and advances waned from 2009 onwards and‚ as a consequence‚ its share of the outstanding balance of total loans and advances shrank from 53.9% in 2009 to 47.5% in 2012.
“It may seem that there is little incentive to accelerate the minimum repayment‚ because one initially sees so little visible benefit in terms of a reduction in the capital amount outstanding.
"However‚ changes in the repayment value in the early stages of repayment of the loan could significantly affect the total cost of the transaction. Small changes in the way a home loan is managed can make a significant difference down the line‚” Kellerman said.
He explained that a typical home loan’s interest is calculated daily and capitalised monthly.
This means that daily fluctuations in balances changes the amount of interest being added to the loan‚ and can incentivise the borrower to pay additional funds into the account as early as possible.
This is in contrast to an instalment sale loan where interest is often capitalised upfront‚ and a fixed amount paid off over a term.
"Flexibond facilities or their respective counterparts at other banks allow easy access to your home loan," said Kellerman.
This mechanism allows easy access to any prepaid (or surplus) funds that have been deposited above the required instalment. Home loans are typically provided at lower interest rates than short-term debt.
The interest rate is directly linked to the risk related to the borrower. In the case of a home loan‚ this borrower risk is reduced by the security that an immovable property offers to back the loan‚ he said.
FNB calculations showed that depositing 10% of the purchase price upfront without reducing the repayment can decrease the time it takes to repay the entire loan by four years and three months.
The FNB house price index showed a 2.6% year on year (y/y) increase for February after a revised 3.9% y/y gain in January.
“The current financially pressured household sector environment necessitates that consumers start understanding how to optimise their debt structures to work towards financial wellbeing. The home loan can be a key debt instrument in assisting with such debt management improvements‚” added Kellerman.
