Basel III set to be a bombshell for homebuyers
The imminent implementation of the new Basel III rules on banking capital and liquidity will undoubtedly make it more difficult and more costly for homebuyers to obtain mortgage finance.
That’s the word from Rudi Botha, CEO of BetterBond, SA’s biggest bond originator, who says: “In our business, we have already seen interest rate concessions on home loans decline over the past few years from an average of 1,5% below prime to the prime rate with most borrowers now having to pay the prime rate of 9% or more.
“The average interest rate granted to customers by banks on the R2,4bn worth of home loans originated by BetterBond in March is now at prime, whereas the average four years ago was prime minus 1,5%.
“And with the implementation of the Basel III rules, we and many key industry people expect that the ‘standard’ home loan interest rate will have to be set one or possibly even two percentage points above prime, because the cost to the banks of funding these loans will rise that much.”
In addition, he says, it is likely that the banks will have even less appetite for long-term lending than they do now, and increasingly prefer to make short-term loans rather than 20-year home loans.”
“In short, Basel III means it is going to get even tougher for homebuyers to qualify for home loans in terms of the income requirements and their credit records, and that they are generally going to be able to afford a lower purchase price than they thought.”
The likely effects of the changes are illustrated by the fact that on a R1m loan amount at a rate of 10%, the monthly repayment would be R9650, compared to R8997 at a rate of 9% over 20 years. “This increase in repayment of more than R650 monthly will impact the affordability of the buyer and the total loan obtainable from a repayment-to-income (RTI) point of view, meaning that this same client will in all likelihood only qualify for a loan amount of R950 000 instead of R1m,” says Botha.
The same exercise on a R500 000 loan amount shows that at a 9% interest rate over 20 years the monthly repayment would be R4498 and at 10%, R4825. The increase in repayment being R326 would impact the buyer’s affordability and this, coupled with the impact it would have on the client’s RTI ratio, would only qualify the buyer for a loan amount of R470 000.
What is more, Botha says, this scenario does not even take into account the expectation that in response to rising inflation, the Reserve Bank will possibly start to raise interest rates again within the next 12 months.
The combined effect of these possible increases, firstly by the banks and secondly by the Reserve Bank to 11% from the current rate of 9% would result in an increase in the monthly instalment on a R500 000 loan from R4499 to R5161, and that on a R1m loan from R8997 to R10 322, he notes.
“And the increases may well not stop there, which is why we believe the time has come for borrowers to consider the possibility of fixing the interest rate on their home loan for a period of time.
“In addition, those who are contemplating a home purchase should not delay too long, as the opportunity for them to qualify for the home loan they want will become more difficult should Basel III be implemented in its current format.”
The implementation of Basel III rule will undoubtedly have a major impact on the consumer’s ability to afford property. In saying this, it’s imperative that these considerations be taken into account when the final decision is taken to implement Basel III.