Wednesday, 19 January 2011
SCRAPPING OF FIXED HOME LOAN INTEREST RATES
Standard bank scraps fixed rates but the rest of the banks hang in there!!!
Standard Bank (JSE:SBK), Africa's largest bank by assets, looks like the only big-four bank that is currently not offering a fixed interest rate for a mortgage in the present market conditions as it not a viable business option for it, leaving its customers left out as rivals continue to offer their customers the opportunity to fix.
so says Moneyweb who contacted all the big-four banks to find out if customers were able to fix the interest for their mortgages in the current market conditions. Put to Standard Bank that it currently did not offer fixed interest for mortgages and asked why that was the case, Africa's largest bank by assets said:
"Home loans borrows funds in tranches from treasury at a specified rate for a specified period. The funds are then lent to customers who enter into a fixed agreement at a specified rate for a specified risk. Tranches are currently unavailable due to the current market conditions as we purchase funds based on current conditions and interest rate expectations as well as demand."
Standard Bank went on further to say that given that the current economic conditions were not ideal in the customer's opinion to fix their rate, it did not make business sense to acquire a tranche from Treasury at a high rate if the bank would not be able to sell fixed rates to customers.
"We would then not be able to service the agreement with Treasury, which would inevitably result in increased future pricing of our fixed rate tranches. Evidently, this is not viable for business going forward. We would however purchase a tranche as demand or market conditions improve," Standard Bank spokesman Ross Linstrom said.
However, Standard Bank noted it had not discontinued fixed rates "as a product", but just did not have tranches available. A Moneyweb reader, who banks with Standard Bank and wanted to fix his rate, expressed frustration why this hasn't been communicated to clients.
FNB, Absa (JSE:ASA) and Nedbank (JSE:NED) told Moneyweb that they continued to fix, but concede demand is low in the current market conditions.
FNB's Head of Pricing, Profitability & capital Management, Praven Subbramoney, said FNB offered the fixed rate option on all registered home loan accounts and had fixed rate options of up to five years.
"The fixed rate option is great for customers that want to maintain certainty of cash flow and reduce the impact of future interest rate hikes. This has a positive impact for the bank since it assists in reducing default risk due to interest rate increases," Subbramoney said, adding the take up trend for fixed rates was influenced by interest rate cycles as well as market sentiment around the future of interest rates in the country.
Currently repo is sitting at a three decade low of 550 basis points, while prime for all the big-four banks (Standard Bank, Nedbank, First National Bank and Absa) is at 9%. The Reserve Bank is currently debating the direction of the Repo rate and is due to come with a decision this week.
"Customers generally react to the news of possible Prime rate hikes with most of our customers only requesting for the fixed rate option once the prime rate begins to increase. From a fixed rate pricing perspective, this is not always the best time to fix your interest rate since the market would have priced in the interest rate adjustment, as well as any anticipated interest rate movements," said Subbramoney.
"We have been in an environment of decreasing prime lending rates, hence the demand for the fixed rate option has been low. We anticipate a higher demand for the fixed rate option once the prime rate starts to show signs of increasing.
Rival Nedbank said its clients may opt to fix their rates for periods of 12, 24 or 60 months, but said the demand was low currently, despite the period being the most beneficial time to fix a home loan rate at the bottom of a rate cycle.
Asked what had been the motivation for Nedbank to offer the option in the current market conditions, Nedbank said:
"The main benefits to customers are twofold: Clients should have financial certainty for a period of time allowing for more accurate future financial planning. Secondly fixed rates protects against unexpected additional monthly expenses. This is particularly beneficial to clients finding themselves under cash-flow constraints," Pat Lamont, general manager of Nedbank Home Loans said.
"Clients need to take cognisance of the fact that fixed rate contracts carry financial penalties should one opt to cancel the contract. Dependent on the term, and the value of the bond amount, this may constitute a substantial amount. Hence, we would suggest that clients consider their options carefully and consult widely prior to entering into long term fixed rate contracts."
Managing Executive for Absa Home Loans Luthando Vutula said the bank offers fixed interest rates on mortgages for a term of one or two years with an option to renew it when the term lapses. It said in the past, it offered fixed interest rates to customers for longer periods, but due to market uncertainty and more frequent changes in interest rates, it decided to put a limit of two year.
"Demand has slowed with the current cycle of low interest rates, however it is expected to pick up should interest rates increase again. With the increase in average house prices over the last couple of years and with the prevailing economic conditions, customers find it difficult to invest in mortgages. For the customer's affordability, it is convenient to know that their mortgage instalment will be consistent for the next two years," Vutula said
So need some advice regards a home loan and finance contact your mortgage fundi and let them assist you .