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Banks and Mortgage Finance (Residential Mortgage Loans)
By arlene | March 19, 2008
At the risk of including information which may become dated during the life of this book, material included on Exchange Control is stated as at the time of writing but is subject to change. Agents dealing with foreign funding must keep current through their bank.
During the early 1980’s, an uneasy truce existed between banks and building societies. Banks concentrated on conventional lending avenues, while building societies focused on the lucrative home loan market.
The building societies had been able to offer investments containing a tax-relief facility and thereby gain a pricing advantage on the home loan. With deregulation these benefits were phased out. Banks entered the home loan market when building societies began intruding into the traditional domain of banks by offering limited cheque facilities.
Barclays Bank was the first bank to enter the home loan market, on August 29, 1982. This move had serious implications for building societies.
Standard Bank entered the home loan market in December 1986. It took the lead in the bond rate battle by offering an interest rate of 12,5 percent—two percentage points below the going rate at the time. Barclays emulated the move. Because building societies were unable to match this they lost market share to the banks.
Building societies then claimed banks had an unfair advantage because of their access to short-term cash sources. Most building societies were sceptical that banks would be able to survive in the highly competitive home loan market. Not only were they proven wrong, but they lost more market share when the banks again took the initiative in 1987 and decided to grant 100 percent home loans to various special categories of clients. By law, societies could not grant bonds of more than 80 percent.
At the same time banks took the lead by appointing specialist home loan consultants, most of whom had passed the Estate Agents Board examination. This showed how institutions could become more service oriented and help both estate agents and clients of the banks.
Perhaps the greatest innovation introduced by banks has been the access bond facility. This special savings and money management facility enables account holders to invest surplus monies into their bond account.
The savings benefit is a reduction in the interest payable on the home loan while these additional funds are in the home loan account because the capital owing is reduced for that period. This facility can, if properly used, reduce the period of the loan and the amount paid over its life.
Innovation and well-planned marketing have seen the banks steadily grow their home loan market shares. Banks also have the distinct advantage of a large nationally spread branch network and active existing customer bases.
Customers were keen to consolidate their banking relationship with a single bank, offering “one stop” full banking facilities. Over the last few years, all major building societies have converted to full banking facilities and compete in all respects.
Residential Mortgage Loans
Because Home Loans are secured by a mortgage bond over residential property, they are an effective form of lending for a bank. They require only half of the amount of bank capital to support the loan in comparison to a normal unsecured loan. This enables the loan to be favourably priced relative to other loan facilities, because the risk of loss is greatly reduced.
A residential mortgage loan is mainly for:
- the purchase of existing residential property.
- the construction and acquisition of newly constructed residential property; and
- further loans or re-advances for further improvements to residential property; and
- the acquisition of residential land in order to improve it (build a house).
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Topics: Agent, Form, Investment, Land, Market, Property, Residential |
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