Shaun Harris
TAKING STOCK
Falling interest rates are starting to attract potential home owners to the property market again. Many of these people are first-time home buyers, the so-called emerging class precluded from the full property market in the past because of apartheid laws or limited access to finance.
Now, it seems that whenever there is a growth industry or a new class of consumers the sharks move in. The microlending industry has provided some examples of this.
A particularly nasty practice, however, is developing in the home loans industry – certain third parties, typically estate agents or mortgage brokers, are charging prospective clients a fee for “arranging” housing finance for them from a bank.
This is not only immoral but also illegal, says Noel Young, divisional director of mortgage loans at NBS Bank. His advice to anyone who has been charged this “administration fee” by an agent or broker is not to pay, and to report it to the bank the client is dealing with in connection with the home loan.
Young also urges consumers to talk to all the banks before settling on a home loan, and not to be influenced by property agents who steer them towards one particular bank, claiming they have a special relationship with this bank and can secure the best deal.
“For most people buying property will be the biggest investment of their lives. They need to consider all the home loan products available from all the banks before deciding which deal is best for them,” he says.
There’s an old and established practice in the industry of banks paying property agents an introductory commission for new business they bring to them. This commission varies – Young says it is usually set at 0,5% of the value of the mortgage bond up to a certain threshold, about R80 000, and reduces thereafter. He estimates the average commission paid by the banks is probably about 0,3% of the bond.
This is not a particularly desirable practice, and surely the consumer must ultimately pay for it indirectly.
Most people probably approach the bank they do business with for a home loan. Wouldn’t it be nice if the bank manager said: “Thanks for keeping your business with us. For being such a loyal client we are going to pay you 0,5% of the value of the bond you have applied for.”
Or if a potential home owner, after studying all the options available, approached a particular bank because they offered the most suitable product for that person and the bank manager said: “Thanks for bringing your business to us. Here’s 0,5% of the bond to spend on new curtains.”
Dream on. Instead that money is paid to an estate agent, who does little more than submit the application for the home loan.
That, it seems, is just the way it is. And to be fair to the banks, a good client with a solid credit record can usually negotiate an interest rate below prime.
What’s totally unacceptable is when a broker or estate agent claims the introductory commission from the bank and then charges the consumer an “administration fee” as well.
“Unknown to us, this has been happening,” says Young. “When we find out about it, we won’t process the loan application or pay the third party. NBS also warns the other banks about the culprit, and refuses to do future business with the party concerned.”
He says the going rate charged for this bogus fee ranges between R1 000 and R1 500.
How prevalent is this practice? “We will probably never know, we only learn about it when the client reports it to us. But I estimate that about 10% to 15% of home buyers are paying an amount they should not be paying to a third party.”
NBS wants the practice stamped out because in some cases it reflects negatively on the banks. Young says he has learned of cases where the broker or agent creates the impression that the administration fee they demand is payable to the bank concerned.
“These third parties tend to prey on the less sophisticated client, often a person buying a home for the first time. They are hitting the people who are not streetwise about buying homes.”
Who are these estate agents and brokers? Not, says Young, the larger and more reputable firms. But there are a lot of smaller players who appear to be doing this, concentrating on areas where the consumer will generally be less sophisticated. And as the demand for houses steps up, so will the number of rip-off artists.
Young is also critical of estate agents who only promote one particular bank, claiming they offer the “best deal”. This is frowned upon by the Estate Agency Affairs Board here, and is prohibited by federal law in the United States, for example. But it happens in South Africa.
“We have no problem with estate agents who have preferred banks – I would love it if they all came to us. What concerns me is that some agents are focusing exclusively on a particular group. No bank can claim to have the best deal – the best product depends on the consumer’s particular needs,” says Young.
“Yet some agents and brokers, who are earning up to 2% commission for introducing bonds to specific banks, are clearly not putting the consumer’s interests first.”
Buying a home, especially for the first time, can be an emotional experience. Typically the consumer just wants to get the deal through, which leaves them open to unscrupulous abuse. There are enough costs involved when buying a house – make sure you don’t pay for anything you don’t have to.