Mortgage Bond Market Review (The Bugle)

To get an understanding of the scale of the American “quantitative easing” (QE) policy of buying financial assets so as the provide financial liquidity – i.e. money into the financial system, it is useful to compare our total national value of outstanding residential mortgages – reported by ABSA to be R809,9 billion to the value of QE. The level of US QE prior to the recent cutting back, had been US$85billion every month! That is more than our entire mortgage balances of the country being pumped into the financial system every single month. Imagine the value of total mortgages in South Africa doubling every month. This “liquidity” did find its way into stock markets – America’s S&P Index grew by 30% last year and the Japan’s Nikkei Index by 57%, buoyed by the monetary stimulus. Some of it definitely found its way into South African financial assets. 

When however the US Federal Reserve decided to cut back on this easing the money started to flood out of emerging markets. Our world is so inter-connected that a first time buyer along the Dolphin Coast looking for a 100% mortgage bond, and finds interest rates 0,5% higher in February 2014, largely because of the impact on our exchange rate of international funds movement, feels this impact directly.  

Ooba, our local leader in mortgage origination, and the facilitator of a good share of the new mortgage business provided annually in the country, recently published their key statistics on the performance of their market. Their average purchase price is R933,528 and their average purchase price of first time buyers is R708,989. I found it interesting that their average approved bond size is R793,931. For those of us who deal at the high end of the market, this seems like a lower than expected average. It does however provide some insight into where the bulk of the mortgage market is. The average size of the cash deposit was still relatively high at 15%, although lower than the 15,8% recorded a year earlier. For those optimists who expect 100% mortgage finance, these stats provide evidence that it is rare and that the terms of your loan will not be as good as when a healthy sized deposit is paid. The average age of their applicants is 37, which seems to remain surprisingly similar from year to year. The one very important benefit of shopping your mortgage application around through an originator, is that their average initial decline ratio is 46,9%. This means that 46,9% of the applications are declined by the first bank it is presented to. So of this pool of initial declined bonds, 25,7% of them will be approved by another bank. The effective approval ratio quoted by Ooba is 65,2%, which is an improvement on the 64,7% of a year ago. Another interesting aspect of mortgage finance is that it is not guaranteed that your bank is going to offer you the best deal on finance – you may have banked with them for many years, but your application will be subject to their current (and often changing) finance criteria. Many people are surprised at the typical 40% cash deposit required when purchasing vacant land. Some banks, such as Nedbank, have a general no loans on vacant land policy.

Published in The Bugle, 19 Feb 2014, Author: Andreas Wassenaar