Banks caution on issuing interest-only home loans
September 22, 2006
By Tonny Mafu
Johannesburg - South Africa's major banks said interest-only home loans had to be issued with great caution as they could prove "punitive" to home buyers who could not afford lump sum payments.
Gavin Opperman, the managing executive at Absa, the largest home loan issuer, said while competition was essential in the mortgage bond market, lenders had to be cautious when issuing home loans in which bondholders had an option of repaying interest only. Interest-only home loans could burden home buyers particularly in a volatile environment. By paying interest only, homeowners would be delaying the paying off of capital, and when they have to settle this debt they may have to sell their home or face a higher instalment.
FNB Home Loans' chief executive, Ed Grondel, said interest-only mortgage bonds would be ideal for "mature" consumers, but could be a "debt trap" for ordinary consumers. He added that it was not advisable to place such products in the commoditised home loans market. The interest cost for this type of home loan is higher when compared with mortgage bonds that pay off their capital.
Mark Boshoff, the head of product innovation and development at Nedbank, said interest-only loans could be beneficial for investors or business people who wanted to buy property with the intention of reselling or renting. For ordinary consumers, interest-only loans could delay ownership. Consumers would also have to consider the possibility of interest rate increases, and determine the benefits of reducing monthly repayments.
Standard Bank said interest-only loans were meant to allow individuals to pay lump sum capital portions against their bond at a rate at which they were comfortable, in a way that assisted them in managing their cash flow management. The problem arose when people were forced to refinance their home loans when they had been unable to pay enough lump sums into the mortgage bond.
Opperman said interest-only loans were a variation on products banks offered in the 1980s and 1990s,which packaged a home loan together with a linked investment policy. These products were not very successful.
Interest-only loans would do well in a robust property market, but when prices fell, homeowners would end up owing more than they owned. These loans did not promote a savings culture and did not encourage homeowners to build equity in their properties, he said.
|
|
