Banks tighten purse strings
Homes can no longer be used as ATMs
THE DAYS OF USING the access facility on your mortgage as a handy cash cow to finance holidays and other discretionary spending appear to be over. Some banks no longer allow clients to borrow willy-nilly from repaid capital – or built-up equity, as it’s referred to – on their mortgage accounts.
Banks have until recently been very aggressive in their mortgage lending on the back of a four-year property boom, which saw the value of total mortgage lending in South Africa almost triple between July 2004 and July 2008: from R368bn to R923bn (SA Reserve Bank figures).
However, the introduction of SA’s National Credit Act (NCA) – coupled to falling house prices, rising interest rates, growing mortgage default risk and fears about the global financial crisis – are clearly forcing banks to adopt more stringent mortgage lending policies.
Absa Home Loans, SA’s biggest mortgage lender with a R220bn book, last week informed clients the terms of its FlexiRe- serve facility would be amended in a bid to “prevent customers from going further into debt and risk losing their homes”.
Gavin Opperman, group executive at Absa’s secured lending division, says in the past clients could automatically withdraw the repaid capital in their mortgage through the FlexiReserve facility. For example, if someone originally borrowed R1m from the bank to buy a house and five years later had paid off R100 000 they could re-borrow that R100 000 with no questions asked.
Opperman says that from now on clients who want to withdraw any repaid capital (or equity) in their mortgage will have to apply to do so. Applications for those re-advances on existing mortgages will be subject to the lending criteria introduced by the NCA.
Opperman says when clients borrow against their existing mortgages, the outstanding balance on that account would obviously increase, necessitating a rise in monthly mortgage repayments. “That means the bank has to make a new income assessment to determine if the client can afford the higher monthly instalment.”
Opperman says Absa felt that allowing access to the difference between the original loans granted and the outstanding balance without a validation of the property’s value and new affordability tests, increases the risk for both the clients and the bank.
Opperman stresses the amendment to Absa’s FlexiReserve facility doesn’t apply to clients who have deposited their own surplus cash into their mortgage. In other words, clients who have deposited R50 000 of their own funds into their mortgages because they want to use the account as a savings vehicle will still have automatic access to that cash. Says Opperman: “In that case nobody needs to apply to withdraw funds, as it’s the clients’ own funds.”
Last week Standard Bank issued a statement saying it hasn’t changed its access mortgage policy. However, it states: “As a responsible lender, Standard Bank will continue to review the access bond facilities of those customers who are in arrears with home loan payments.”
Pramod Mohanlal, divisional GM at Nedbank home loans, says clients looking to access equity in their mortgages have always had to apply for those additional funds, with Nedbank carrying out a new credit assessment of the client and the property.
“But for clients who have paid surplus funds into their mortgage accounts and are ahead of payment schedules, there are currently no withdrawal restrictions,” says Mohanlal.
Clamping down on borrowing against access mortgages isn’t the only way banks are trying to protect themselves against the risk of rising mortgage defaults. First National Bank caused quite a stir in August when it announced it would re-assess mortgage applications approved in principle more than a year ago but hadn’t yet been registered. That applies mostly to clients who bought property off-plan and are still waiting to take transfer.
At the time, FNB said the bank’s intention was to ensure clients could still afford to repay the mortgages applied for to prevent an over-indebtedness position.
Banks are also requiring bigger deposits from new homebuyers. Saul Geffen, CEO of mortgage originator ooba (formerly MortgageSA), says its research shows the average deposit required by banks on new mortgage applications had risen from 12,2% to 18,6% in the 12 months to September 2008.
Industry players say although SA’s banks don’t yet face the same bad debt risk as many mortgage lenders in the US and Britain do, arrears in local mortgage books are rising sharply off a low base.
Although the SA Reserve Bank hasn’t published official figures on non-performing mortgages since December 2007, Alliance Group CEO Rael Levitt maintains mortgage defaults have increased tenfold over the 12 months to end-September 2008. Levitt says Alliance’s research showed an estimated 70 000 South Africans are currently in mortgage arrears for two months or more.
No more easy money. Gavin Opperman
70 000 SA homeowners in arrears. Rael Levitt