Bugle Sales Talk Editorial

27th April - 1st May 2015

The dramatic collapse of JSE listed African Bank Investments last year brought into the spotlight the dangers of unsecured lending and the aggressive extending of credit to clients who have a high likelihood of not being able to service their debt. Unsecured lending followed a textbook pattern of an asset bubble, which peaked towards the end of 2013 and fell off a cliff in 2014. Unsecured credit consists of general loans and advances, credit card debt and overdrafts. Growth in unsecured lending is now down to a more modest 5% year-on-year growth rate, with total household unsecured credit balances amounting to R344,7bn. The secured credit balances of households as at the end of February amounted to R1,082.7 bn and showed growth of 2,8%. Secured credit includes installment sales, leasing finance and mortgage loans. I like to refer to this as "good" debt because it leads to production and the investment in an asset in the case of mortgage finance, which will grow over time. Debt used to finance current consumption expenditure is "bad" debt. The value of total mortgage balances in South Africa amounts to R1,169.9bn and grew by 4,4% year-on-year at end February this year, driven largely by the corporate mortgage balances that make up 28,5% of all these mortgages. So what about household mortgages because these are the households that are of interest to estate agents. The total household mortgage balances in South Africa as at end February was R836,4bn which represents 71,5% of all mortgages in the country. The year-on-year growth rate was a more pedestrian 2,2%. This lethargic growth in new mortgages for residential property is the single biggest impediment to a more robust property market.

Although we are currently enjoying a low Consumer Price Index (CPI) inflation rate of 4% and a Producer Price Index (PPI) rate of only 2,6%, ABSA bank have forecast CPI inflation to rise above 6% by the end of 2015 and that we can expect an increase in interest rates in September of this year. So what happens to your mortgage payments when interest rates increase as expected. Considering a R1,000,000 mortgage bond on a 20 year term at the current prime rate of 9,25%, your monthly installment will be R9,158.67. If interest rates were to increase by 1% to 10,25%, the installment increases to R9,816.43. This is an increase of R657.76 or 7%. If interest rates were to increase by a further 1% to 11,25%, there would be a further R676.13 payable monthly on your bond, again representing a 7% increase. However from the initial position the increase is now just under 15%. If we repeat this exercise again to increase interest rates to 12,25%, an additional R693.09 is payable every month and the cumulative increase is now R2,026.98 per month and just under 22%. In this way progressive increases in interest rates can impose a growing burden on a mortgage bondholder and very quickly impact on the affordability of the repayment. The prudent approach when calculating your affordability and repayment schedule you will be faced with, is to calculate what would happen if interest rates would increase by 3 percentage points. As long as you can comfortably afford an increase of that magnitude on your monthly repayment commitments you will have enough comfort to be able to weather the next interest rate cycle.

For further information and an interactive analysis of this article follow my blog: andreaswassenaar.blogspot.com.