Mortgage originator questions the cost to consumers of fixed mortgage system

MortgageSA, South Africa's leading mortgage originator placing one in five mortgages, said that the possibility of a fixed mortgage system, currently being discussed by the Reserve Bank, could be a double-edged sword for consumers.

"While it is difficult to comment without knowing the full details, a fixed mortgage system may reduce overall volatility risk, but will inevitably result in higher interest charges and higher mortgage repayments for consumers.

"Although we fully support the reserve bank's agenda of promoting access to home ownership, removing such risk will come at a cost," said MortgageSA chief executive Saul Geffen.

Geffen notes that interest rate concessions for variable mortgages are at their highest level ever, with the average rate concession now around 1.5% below prime, while maximum concessions can be up to 2.25%. Historically, fixed rate mortgages are offered by the banks on a prime plus basis as it costs the banks to hedge the interest rate risk and they pass this cost on to the consumer.

"Should there be a move to a fixed mortgage system, a one percent cutback in the rate concessions currently offered to borrowers would cost homebuyers over R24 billion a year (based on the total new residential home loans of R150 billion per annum and the average 20 year life of the bonds).

"The real cost is more likely to be R48 billion as the cost of hedging will most likely add two percent to the funding costs. The costs of hedging the entire R600 billion SA home loan book would be obscene.

"While the volatility of interest rates is a financial risk associated with buying a home, fixed interest rate products are freely available from all the financial institutions, enabling borrowers to completely mitigate this risk.

"In circumstances where fixed rate products are a commodity, it seems that an artificial fixed mortgage system will only create unnecessary complexity. Borrowers should be able to choose whether they prefer a variable rate or fixed rate mortgage depending on their individual risk profile and affordability. A one-size-fits-all approach is not consumer friendly."

Geffen notes that the current system works very well, and the volatility of interest rates is not a real factor in the housing market, as long as interest rates are kept within affordable limits. Homebuyers buy within their means, and the SA housing market has experienced a prolonged boom despite a relatively volatile interest rate environment. High interest rates are a real barrier to entry in the property market, however the potential volatility of interest rates are not.

"The possibility of greater certainty for home loan borrowers will be more than offset by the cost to consumers of increased interest charges. Countries such as the US, UK, Australia and Canada which have healthy functioning property markets operate on a similar basis to the current situation in SA. They do have longer term fixed rate products, up to 30 years, but SA is not far behind in product development and we believe it is not long before a 20 year fixed rate product is offered by all the major institutions in SA. Already, fixed rate products of up to 20 years are offered by some SA non-bank home loan providers."

Geffen says the Reserve Bank has done a commendable job over the past few years in lowering interest rates and keeping them low.

"The lower rates have improved affordability and enabled many South Africans to own their own property. We strongly believe that if government sticks to its sound fiscal policies, there should be a continued structural decline in interest rates and improved interest rate stability and this will facilitate and sustain broader participation in the property market."

Geffen said the full impact on the property market could only be determined when and if such a system was formerly proposed.

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MortgageSA, South Africa's leading mortgage originator placing one in five mortgages, said that the possibility of a fixed mortgage system, currently being discussed by the Reserve Bank, could be a double-edged sword for consumers.