Banks make most of their money when they lend to customers and charge interest.
That is essentially how they get money to run their businesses and generate profit.
In other words, no lending, no profit.
When a bank lends you money to buy property, it allows you to purchase a property that otherwise you would never have the money to buy.
It is the best investment you will ever make.
Over time, property values rise and you get the benefit, as banks don’t participate in your profit.
It used to be that banks lent 70-80 percent of the price of the property and you had to find the cash for the balance.
You also had to find the bond and transfer costs.
That means the banks risk was about 75percent.
So, if you defaulted and the banks sold the property as their security on the bond.
If they achieved 75 percent or more of the current market price of the property, they would get their money back.
But times have changed.
The Consumer Protection Act (CPA) and a whole raft of other “consumer-based” legislation have changed the situation.
While the CPA was introduced in a bid to “promote a fair, accessible and sustainable marketplace for consumer products and services and for that purpose to establish national norms and standards relating to consumer protection, to provide for improved standards of consumer information, to prohibit certain unfair marketing and business practices, to promote responsible consumer behaviour”, among others, it has brought with it some challenges.
It has now become near impossible from a cost and time point of view for banks to sell a property in execution – ie when a client fails to service their bond.
Just getting a magistrate to agree to the sale, despite the lender being years in arrears, is a nightmare and the costs involved are horrendous.
Further, bonds are mainly 100 percent nowadays, so banks are unlikely to recover the outstanding bond and interest.
Arrear levies and rates need to be paid by the buyer so the price achieved is often half of the real value of the property.
If it was my money, the last place that I would lend it would be as a 100 percent loan for somebody to buy a home.
Times need to change.
- Mike Spencer is the founder and owner of Platinum Global. He is also a professional associated property valuer and consultant with work across the country as well as Eastern Europe and Australia. You can contact him via email: mike@platinumglobal.co.za