So far the year has experienced a variety of offerings — from products directed at the affordable housing market to equity release to fixed rate offerings, the latter demand boosted by rising interest rates.

However, the South African mortgage market is still heavily inclined towards variable interest rate loans (i.e. pegged to the rise and fall of the prime interest rate), with less than 10.0 percent of loans on a fixed rate.

Fixed mortgage rate bonds

Traditionally, fixed rate mortgages have been unappetisingly short term, but some lending institutions are busy investigating fixed rate mortgages bonds over longer periods. Currently, there is quite a premium on fixed rate offerings, even for 12 months, so one can expect a higher premium for longer term products as the bankers hedge their currency and interest rate bets.

Standard Bank reports that apart from the continued decline in house price growth, the growth in home loan applications has also been slowing down. This appears to clash with reported strong growth in mortgage advances, but this is due to a spurt in corporate borrowings which is helping to conceal the decline in private mortgage applications.

Comments the bank: “While current mortgage market temperature appears to be cooling off for the time being, the levels of growth experienced over recent years have placed the South African property market on a whole new playing field.

House price stabilise

“Overall, the South African mortgage market bodes well, as house prices continue their passage onto stable levels, as this is beneficial for sustainable future growth. Standard Bank does not expect negative house price growth in the near future — however, this cannot be entirely ruled out, specifically for individual homes.”

The bank further points out that declining house price growth essentially alleviates worry about an over-inflated mortgage market as nominal house prices level off to a steady plateau.

There is a great deal of concern with regard to what is seen as an unacceptably high level of mortgage debt (much of it being used for the purchase of goods and services far removed from bricks and mortar).

Yet in comparison with other countries, South Africa’s level of mortgage debt is relatively modest. This, however, must be interpreted in context of the difference in interest rate levels between the countries.

Cracks in the US

For example, the US is able to sustain higher residential mortgage debt due to its lower interest rates. But cracks are appearing. A recent report in the UK, for example, showed that more than 700 000 mortgage bondholders were behind with their payments.

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Published courtesy of Intellectual Property Magazine.

It adds: “There are indications that the general public has the belief that defaults and repossessions are growing, judging by the increasing number of requests received asking about repossessed houses. But this is not the case.”

Securitisation is an interesting development. Globally, it has facilitated the mortgage market into wider capital markets which decreases the severity of business cycle troughs.

In addition — something we would like to see in our market — it keeps rates artificially low because the source of funds used in order to create new home loans can be “refreshed” a lot quicker, which then allows capital to flow more quickly from investors to borrowers.

Should South Africa experience (hopefully) single digit interest rates in the future, it can be expected that home mortgage debt will increase — but this will be due to a higher level of affordability, given lower interest payments.

What does it costs to fix your bond interest rate?

Security variation fee:
If your home loan is already registered, you will be required to pay an upfront fee (a security variation fee) of R100 plus VAT for entering into a SecuraRate option. This amount will be debited to your home loan account, or you may pay this fee into your home loan account to cover the amount debited. This fee is to cover the variation to the terms of your mortgage bond.

Interest rate option cancellation fees:
The interest rate option will end when you sell your home or the bond is fully paid up. Early termination interest will be levied if you cancel or suspend the agreement. You are required to give the bank at least 90 days written notice of your intention to settle your home loan.

Should you not give the required notice the bank is entitled to charge the 90 days interest in lieu of this notice. If you take out a new Standard Bank home loan and the bond is registered within six months of the cancellation of your fixed rate, the early termination interest will be credited to your new home loan account.

Expiry of rates:
Upon expiry of the fixed rate contract, the procedure is as follows:
— The home loan will automatically revert to the prevailing home loan base rate on the day following expiry or
— The customer can apply for another fixed rate option 30 days prior to the expiry of the existing contract at the rate on offer at that time.