Foreign banks arrivals will benefit borrowers

South African property investors and homebuyers can look forward to a growing offering of sophisticated and innovative borrowing packages as international banks re-enter the country's financial markets, according to an article in the August edition of Intellectual Property magazine.

While the traditional building society mortgage bond platform has more of less disappeared as banks swallowed societies – followed by the extraordinarily swift success of the relatively new mortgage origination business – developments in financing real estate, residential and commercial, have ballooned almost beyond belief.

Mortgage originating companies have taken some 60 percent of the country's home loans business, offering turnkey financial solutions for home buyers, while at the same time forcing banks to focus on their product development, pricing and service to remain competitive.

Home buyers now go to mortgage originators who shop around for the best deal, carry out all the negotiations, sort out the paperwork, right through to obtaining insurance cover. MortgageSA, which has about 20 percent of the market, has, for example, processed in excess of R50 billion in home loans for 150 000 South Africans.

The company's MD Saul Geffen points out that increased competition between banks, driven by origination, is directly responsible for cost savings in interest repayments by consumers of more that R15 billion a year.

MortgageSA has now joined forces with Standard Chartered Bank; one of the FTSE's Top 25 listed companies, which has now moved into the SA market.

Standard Chartered is the first international bank to offer mortgages in this country. Says John Kivits, MD of Standard Chartered South Africa. “We are looking forward to providing new and existing home owners with a viable alternative in financing their lifestyle needs.” Which suggests, surely, that Standard Chartered is looking beyond home loans in its overall lending plans.

The Barclays/Absa deal will undoubtedly also shake up the mortgage bond market. As it is, Absa's retail division's top profit earner is its home loans sector. Barclays obviously perceives this as a prize on which to add its own marketing and lending skills.

Says Saul Geffen: “The arrival of international banks in the retail banking space will play a significant role in redefining the delivery of financial services and home loan products and will create some dynamic market shifts in the years ahead. We expect international banks to take a significant share of the South African mortgage pie and increase competition in the market in respect of pricing, product innovation, technology and service delivery.”

Compared to overseas countries – Australia for example – the mortgage bond market in South Africa is wide open for innovation, ready, for example, for investment, insurance and other lifestyle links. It is also a cash cow limited to very few players.

Australia, for instance, has more than 50 financial institutions involved in home loans and ore originators (they call them mortgage brokers) than sheep (well almost….).

In the UK so-called “ sinking funds” – mortgages linked to endowment policies, which work well in a relatively low interest rate environment – are popular.

In South Africa we have experienced considerable growth in investment mortgages, as investors in property have taken advantage of low borrowing rates and high capital growth, which has fuelled the buy-to-let and holiday home markets. This sector has been partly responsible for the dramatic increase in residential property prices; however, should gearing turn against them a sudden flood of dumped properties could well have the opposite effect.

Standard Bank comments: “The proportion of property owners who are investors (rather than owner-occupants) has been rising steadily over the past four years, while a smaller proportion of properties are owned by investors. In other words, there are more investors participating in the property market but on average each of them is buying fewer properties. This could be attributable to the rise in the number of new entrants in this market who are buying their first investment properties.”

There are warning signals emanating from the buy-to-let investment market. The sharp increases in house/apartment prices combined with a slowdown in rental income is eroding the yield earned by property investors, which may leave some over-extended in an over-supplied market.

However, those investors who have tenants, even at less than attractive rental yields, are continuing to discount their negative cash flow-to-bond-repayment situation against the current capital appreciation. If this drops dramatically, there will be a shake out.

Meanwhile, as new previously disadvantaged buyers emerge the financial sector has been prompted into finding innovative solutions to make home loan financing available at every level. Government has taken several steps to unlock mortgage lending to this sector. The 2004 Budget, for example, raised the transfer duty threshold marginally