Pricing of a loan from a Commercial Bank: Part 6

2019-08-08T05:31:37+00:00August 8th, 2019|News|

Banks contribute positively to society by enabling simple, safe and efficient management of money, writes Pierre Venter. This is the final of a six-part series, which has run over successive days. 

Conclusion

The Home Loan business for a bank is a volatile business, as it is dependent on economic cycles and long-term investor confidence in a country. By its very nature, property is a commodity which operates within a cyclical bubble which ranges from bust to boom. Whilst it compares favourably with other forms of asset classes over the long term, there are risks which both lenders and consumers alike face, especially when property prices are in the decline due to tough economic conditions, a stock over supply, or economic or political uncertainty.

Housing is also a socio-economic need for families; one should view property not only from an investment perspective, but also from a family perspective. It has an economic growth and job creation effect on the economy. Whilst it can be viewed as the backbone for wealth creation, it also carries with it social and political sensitivity, which makes the role of a responsible lender that much more important.

What is interest and an interest rate?

  • Interest is a fee the bank charges for lending people money.
  • This fee is based on something called an interest rate.
  • Interest rates are generally determined by the repo rate and the South African Reserve Bank has the mandate to set the repo rate.
  • The repo rate is the rate that the Reserve Bank charges commercial banks.
  • The Reserve Bank’s mandate is to ensure sustainable economic growth and price stability for the South African economy.

What interest rate options may be available to me as a customer?

  • Getting a preferential rate is dependent on the customer’s individual risk profile and credit record.
  • To arrive at the individual rate, the bank is required to perform an affordability assessment before granting credit as required by the National Credit Act.
  • The National Credit Act also regulates the maximum interest rates that commercial banks may charge customers.
  • For Home Loans, banks will look at a number of factors when assessing the customer’s application for a home loan, including:
    • Income
    • Actual expenses
    • Credit Profile or Credit Record
    • Current credit exposure (how much debt you currently have or are owing to creditors)
    • The term of the loan
    • Amount of loan being applied for
    • The property to be mortgaged
    • Whether you have a deposit or not

 The challenge of affordability

  • Whilst credit records, conduct of accounts and actual monthly budgets play a key role when assessing home loan applications, affordability accounts for the largest portion of customers’ home loan applications being declined.
  • In cases where applicants have healthy credit records and good financial conduct, some simply cannot afford the monthly instalment based on their actual living expenses as measured using a detailed affordability assessment.
  • Banks’ affordability assessments are in line with the requirements of the National Credit Act, 2007, as amended.
  • The NCA has significantly changed the approval landscape, rightly so to protect both customers and the banks from the effects of reckless lending.
  • So, the simplistic repayment-to-income measurement has evolved to a more realistic understanding of a customer’s actual financial circumstances.

 

Pierre Venter is the general manager, Human Settlements in Market Conduct Division at the Banking Association South Africa.