Will skills in applying for bonds need to be learned?

Recent forecasts from reputable economists indicate that as the South African (and the world) economies are unlikely to recover in the foreseeable future, the South African Reserve Bank’s prime interest rate will probably be at flat line levels for a further two years.

In fact, a 0.25% interest drop is probable quite soon, according to Bill Rawson, Chairman of the Rawson Property Group.

“A further drop in the already very low interest rates,” said Rawson, “should be a stimulant to the residential property market.  However, here again, trustworthy analysts are not predicting a significant upswing, even though the demand for homes is very strong.”

"This," said Rawson, "is not a happy situation, especially as the main reason for the market being held back, despite so many people wanting to buy homes, is still that only about 55% of applications for bonds are awarded."

What can be done to remedy this state of affairs?

Rawson said that either the banks will have to modify their systems or consumers will have to become a great deal more astute in complying with the banks’ criteria.

“There is a woeful lack of information out there for potential home buyers on how to maximise their chances of making a successful application. Furthermore, it is not only the low income groups who are uninformed on these matters. I recently came across a case where a high earning executive applied for a bond, but did not get it. It transpired that he had not mentioned his wife’s earnings and certain extra income that comes his way regularly. If he had done so, he would have qualified. Fortunately in this case a second, adjusted application has proved successful.”

This sort of situation, says Rawson, is quite common in many bond applications, but can often be prevented if people consult a good bond originator. People who do so, he said, have significantly raised the success rate in bond applications.

"The banks’ systems for judging awards are now very inflexible," added Rawson, "and they are basically no more than scorecards. An allowance must be made for each applicant to be judged individually, as happened in the old days when experienced bank managers were given scope to assess each application on its merits, taking into account the applicant’s assets, job security and integrity."

Before the 2008 financial crash, says Rawson, the banks operating on more flexible systems lent without sufficient care in establishing the borrower’s creditworthiness - but this trend had been nowhere near as irresponsible in South Africa as it was in the USA, UK and Europe.

"In the circumstances," Rawson continued, "it has to be acknowledged that, although the National Credit Act has ‘hit’ turnover in the residential market, it was a wise piece of legislation. It has protected inexperienced consumers, especially those in the emerging sector, who have shown a tendency to over-borrow in many fields."

Excessive lending in the pre-2008 era, says Rawson, had been based on the belief that all property loans would be underpinned by ever rising property values, just as all borrowings in the general economy would be underpinned by a fast rising GDP and exports.

“The price levels since the 2008 crash,” said Rawson, “have shown just how misplaced that confidence can be and people have once again come round to accepting that economies are, always in the end, cyclical.”

“Most property economists are now saying that what we are experiencing is the new norm and we should not expect major changes.”

"Nevertheless, the wisdom of buying now," said Rawson, "is reinforced by the rise in rentals, which, I predict, will escalate rapidly in the years ahead. Anyone renting now will find themselves paying out more and more each year. Mortgage bonds, by contrast, will become increasingly affordable as salaries increase and escalation devalues the amount paid each month.”

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