De­posits make them­selves felt

It’s no longer so easy to buy a car or a house

Finweek English Edition - - Letters -

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.

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