Risk dictates home loan interest

Jo-Maré Duddy



Dropping the home loan base rate to the prime lending rate of local commercial banks and introducing a single interest rate charged on mortgage loans are not viable as part of debt relief in the Covid-19 environment.

“Mortgage rates include a risk premium which vary from one consumer to the next and hence may not necessarily be equal to the prime lending rate,” the deputy director of corporate communications of the Bank of Namibia (BoN), Kazembire Zemburuka, told Market Watch upon enquiry.

The industry standard for the home loan rate is 100 basis points above the prime lending rate. At present, the prime lending rate of local commercial banks is 9% and the home loan base rate (HLBR) is 10%.

“We all adhere to this as a base rate,” says the chief marketing officer of FirstRand Namibia, Tracy Eagles. FNB Namibia is part of FirstRand Namibia.

The HLBR has already dropped by 125 basis points this year. The BoN lowered its repo by 25 basis points in February and by 100 basis points last month – the latter to combat the impact of Covid-19 on the battered economy.

Individuals' total home loan debt at commercial banks at the end of February was nearly N$40.2 billion, according to the latest BoN data. Business' total mortgage debt stood at about N$12.9 billion.



Individual basis

Home loan applications are assessed on an individual basis and the base rate pricing adjusted for risk to determine the individual client rate, says the executive officer of marketing and corporate communication services at Bank Windhoek, Jacquiline Pack.

Factors such as creditworthiness, affordability, property values and loan tenure are considered as part of the assessment, she adds.

According to Pack, home loans are priced below the prime lending rate in many cases.

“Changing the interest rate to the prime lending rate could therefore mean increasing home loan interest rates in some cases,” she says.

Eagles says “a single rate applied to all individuals no matter their credit circumstances is unfortunately not a fair process across all customers”.

She points out that regulations require certain credit protocols to be met in the granting of credit that has reference to financial means being in place.

Zemburuka says some clients prefer to continue paying their home loans at a higher instalment than the one determined according to the repo rate.

“The Bank of Namibia encourages consumers to engage their individual banks regarding the final interest rate they are charged on their home loans,” he says.

Eagles emphasised that the Bankers' Association of Namibia (BAN) recently strongly encouraged clients to continue paying their debts off as long as they can. This will help to minimise the risk of longer term commitments in potentially more difficult conditions down the road, she says.

However, FNB Namibia “is definitely working on a payment relief solution in the home loan space”, Eagles says. Details will be announced soon, she adds.

'Precarious'

In their economic outlook for 2020 - released before the Covid-19 outbreak in Namibia - Cirrus Securities said commercial banks have experienced a “significant uptick in their arrears and non-performing loans”.

The recession, over-indebted consumers and falling property prices have been a “precarious combination for the commercial banks”, Cirrus said.

“Over N$1 of every N$8 of mortgage loans is in arears,” the economists said.

As of the third quarter of last year, 13% of all mortgage loans extended by the commercial banks were in arrears, with a large portion in the non-preforming loan bucket, Cirrus' analysis shows.

“As at 30 September 2019, arrears as a percentage of gross exposures amounted to 9.54% - increasing 2.08 percentage points from 7.46% at the end of 2018,” they said.

Cirrus said they expect to see banks having to increase repossessions, and having to manage out repossessed properties over an extended period of time – at least three years.

“At the same time, supply of properties from repossessions, coupled with general reluctance to extend mortgage loans in the current credit climate, will keep downward pressure on prices (and collateral values) for the foreseeable future,” the analysts add.

Cirrus said the debt levels of the average household are approaching 100%.

“In other words, the average Namibian household has already spent nearly all next year's income,” according to Cirrus.

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