There is a widespread perception that the big four banks set mortgage rates at the same level as the prime rate — 3 or 4 percentage points above the Reserve Bank’s repo rate — but interviews with bond originators reveal that the bond rate can vary by as much as 5 percentage points, from 1.2 percentage points below prime to plus 4 percentage points.
Bond originators shop around for the best mortgage rates for their clients, usually home buyers. The deeds office processes more than R6-billion in new mortgages each month and bond originators hold 50% of that market.
A 4 percentage point difference on a home loan can mean a big difference in payments. Applied to a mid-size bond of R950?000 over an average period of 20 years, the cost of servicing the bond at prime plus 4 would be R11?134 a month. Set at prime, the monthly payment would be R8?550.
The rate homeowners pay is determined by factors such as their creditworthiness and the size of the deposit. There has been a raging debate in recent years about both the gap between the repo rate and prime and the fact that the big four banks all set prime at the same level.
Both the current Reserve Bank governor, Gill Marcus, and her predecessor, Tito Mboweni, and Finance Minster Pravin Gordhan, have paid attention to the issue. A Reserve Bank/Banking AssoÂciation of South Africa (Basa) study found in 2009 that the prime rate “serves as a convenient reference for floating lending rates, but does not determine lending rates”. (See “Lending rate not fixed to prime”).
Currently the lending rate offered to a bank’s clients ranges from prime less 1.2 percentage points to prime plus 4 percentage points. The National Credit Act prescribes a limit of prime plus 6.5.
Originators negotiate with financial institutions to secure the best rate for clients, but this is not solely dependent on the prime rate and can be hiked or lowered depending on which bank is approached and the individual’s credit risk profile.
Saul Geffen, the chief executive of ooba (formerly MortgageSA), said recent ooba statistics showed that the interest rate a bank would offer on a home loan could differ by as much as 1.4 percentage points for the same customer and loan profile. Statistics for June 2011 showed that 23.2% of applications declined by one lender were approved by another.
“Credit and risk profiling of applicants are specific to each bank,” said Geffen. “Lenders often look favourably at buyers with a deposit and will be more open to negotiate a competitive interest rate on a home loan.”
Rudi Botha, the chief executive of Betterbond, the largest bond originator in the country, said that before 1997 the deeds office was processing bonds up to R28-million monthly and rates ranged from prime less 2.5 to prime plus 0.5.
From 600 bond origination companies, there are now about 150, the three largest being Betterbond, ooba and Multinet Mortgages. The new home loan market is valued at about R72-billion a year.
Praven Subbramoney, the head of pricing, product, profitability and capital management at FNB Home Loans, said the bank negotiated on up to 30% of its deals with clients. Although there was a degree of flexibility the cost of borrowing money ultimately had to be passed on to the consumer, he said.
Although Basel III required banks to have a key capital ratio of 4.5% and a new buffer of a 2.5% by 2018, banks already had to take this into consideration when agreeing on a repayment fee, Subbramoney said. Loans, which include all lending products, had not been entirely repriced as yet, he said.
Lending rate not fixed to prime
A 2009 study conducted by the Reserve Bank and the Banking Association of South Africa, “The role of the prime rate and the prime-repurchase rate spread in the South African banking system”, found that the size of the spread between the repo rate and prime was immaterial to the setting of lending rates, as prime was used as the benchmark for pricing loans.
“Any change in the spread or benchmark rate will not change the methodology for establishing actual bank lending rates,” the report said. “A uniform spread helps to create a competitive environment for banks, which enables customers to choose between products and negotiate interest rates based on their credit profile.”
The report said banks’ lending rates were determined by three factors: the cost of funding them , the credit risk profile of the client and the degree of risk appetite of the bank itself. Although banks might quote many of their floating lending rates relative to prime, the report noted, that did not imply that they priced their loans from prime — the banks offered a rate expressed at a link to prime.
“Establishing this link helps to facilitate the transmission of future interest rate adjustments to existing longer-term floating-rate loans. The prime rate therefore serves as a convenient reference for floating lending rates, but does not determine lending rates.”
In recent years the average calculated yield on banks’ rand-denominated loans and advances has fluctuated below prime, indicating that prime no longer represents the minimum lending rate and that there is no fixed relationship between the repo rate and lending rates.