Prospective homeowners need to stop ‘reckless borrowing’

Just about everyone cheered recently when the reserve Bank decided to leave interest rates unchanged again, but it was not necessarily such good news for the real estate market.
That’s the word from Rudi Botha, CEO of BetterBond, SA’s leading mortgage originator, who says: “The problem is that instead of making the most of another opportunity to reduce their debt levels, the majority of SA consumers will now probably do what they usually do – indulge in another round of ‘pro-cyclical’ borrowing that raises their debt levels even higher, and puts their prospects of becoming a homeowner even further out of reach.”
Reserve Bank figures show that the total value of outstanding credit balances in SA’s household sector grew by 9,8% in the 12 months to end-February, to just over R1,3 trillion, he notes. “And most of this gain was accounted for by steep increases in instalment sale debt (which grew 19,6% year-on-year) and unsecured debt such as personal loans, bank overdrafts and credit card debt (which grew 27,4% year-on-year).
“By contrast, the total amount of outstanding mortgage credit, which includes both commercial and residential property mortgages, only showed a 1,6% year-on-year increase at end February. This slow rate of growth is largely attributable to a decline in commercial mortgage borrowing, but even separated out, the year-on-year growth in outstanding residential mortgage balances was only 2,8% - and it is expected to remain in single digits for the foreseeable future.”
Writing in the BetterBond newsletter, he says that what this means is that there is not going to be any swift or substantial increase in the number of homebuyers applying for bonds – or obtaining them – in the near future.
“In other words home sales numbers are not going to rocket - and the reasons will not only be the slow economic growth, shaky consumer confidence and steep hikes in the cost of major household budget items such as transport, food, and electricity that are being quoted by most economists and property experts.
“Absa property analyst Jacques du Toit recently pointed out that the continued strong growth in instalment sales (essentially incurred for the purchase of items such as new cars, furniture and appliances) and unsecured borrowing means that these two kinds of debt now account for a much bigger share of total household debt than previously.
“In fact, mortgage debt now only accounts for about 60% of total household debt, and what that means is that many more people could quite easily afford to become homeowners, and obtain the home loans to do so, if they would just stop stretching their household finances to repay substantial short-term borrowings – at much higher rates of interest than are applicable to home loans.”
In short, Botha says SA consumers urgently need to become more aware that home loans are arguably the “cheapest, most flexible way of borrowing money".
As noted by Ewald Kellerman of FNB Home Loans at the recent BetterBond Road Shows, he says: “Home loans are typically priced more competitively than short-term debt, and carry many advantages including interest savings, with any surplus funds deposited into a home loan performing much better than a separate savings deposit that attracts a lower interest rate.
“They also offer the opportunity for sensible debt consolidation. Properly managed, a home loan can be used for vehicle and other purchases.”

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