Deposits make themselves felt
It’s no longer so easy to buy a car or a house
DEPOSITS ARE BACK when you buy a car on hire purchase and take out a mortgage. That isn’t something introduced by new Government legislation or the National Credit Act. It’s been brought back quietly by those who lend money – the banks themselves.
Suddenly, South Africa’s new generation of consumers has to learn about something that the older generation – most of those who still remember that practice are standing with one foot in the grave – had to live with for many years. If you wanted to buy a car on credit (hire purchase) you needed a 25% deposit. Sometime early in the Seventies that was reduced to 20% and then gradually disappeared.
When buying a house you also needed a 25% deposit, and the monthly repayment wasn’t allowed to exceed 25% of your salary. Later there was a measure of relief when your spouse’s salary could also be included in calculating household income, which determined the size of the mortgage repayment.
All that was governed by law. The deposit on a car was 20% and the maximum repayment period was 30 months. And that was that.
In the good years – between 2005 and 2007 – new entrants to the credit market could buy things much more easily. Motor dealers’ showrooms started looking like the foyers of five-star hotels and buying a car was done completely differently. “Top of the range with all the extras and 100% financing,” was the welcome given by several dealers if a prospective buyer had the temerity to walk through their doors.
Now things have quietly changed. There were no public announcements, as were required for the National Credit Act. The new requirements for deposits on hire purchase and mortgages are slowly making themselves felt in the market. Last week there was a bit of a public difference of opinion between Absa and Nissan because the bank no longer wants to grant 100% loans to prospective buyers of large trucks and yellow tractors. They now want a 20% deposit. That’s quite substantial and could be as much as R200 000 on one of those new beasts, which could easily cost R1m.
In the mortgage advances section the practice now appears to be that when applications from mortgage originators come through that don’t offer a deposit of 10%, 20% or even 25% they’re simply returned to the bottom of the “in” tray every time they reach the top. Nobody admits that officially, but something is happening. Buying is no longer so easy and economists would do well to resurrect two forgotten terms: those are “deposit sensitivity” and “repayment sensitivity”.
There’s a good deal of advice that can be passed on to the new generation of borrowers who may be struggling to scrape a 20% to 25% deposit together. For a start, learn how to manage your affairs properly. Just maybe you don’t really need that massive 4x4, even on our country’s potholed roads. Prospective homeowners may perhaps have to be satisfied with something slightly less imposing than the currently popular R1m to R2m residences in security complexes.
Here’s an example for the new generation that has little knowledge of deposits and how good it really is to buy something only after you’ve saved the deposit. It’s the cost of a R1m house bought with a 100% mortgage versus the same house after you’ve first put together a 20% deposit. The third column shows the possible good news by, hopefully, not later than year-end 2009.
Look how nicely the repayment falls for a R1m house with a 20% deposit and an interest rate that’s dropped from 14% to 10%.
Unfortunately – or perhaps fortunately – deposits pinch harder than repayments. Many buyers will choose option 1: no deposit, 14% interest and a monthly repayment of R12 435,21 rather than the inconvenience of first saving for a deposit but then later perhaps enjoying the pleasure, if they still occupy the house, of a much lower interest rate.