Catherine Sasman
12 August 2008
Windhoek — In a tough housing market and harsh economic climate, homeowners must buckle up and service their loan repayment, so say the banks.
Homeowners are buckling under pressure to service their monthly home loan instalments, especially after the last increase in prime lending rates.
The result is a desperate clamour for solutions not to fall in a debt trap, or worse, lose their houses, amid increasing reports of house repossessions in a starkly difficult financial environment.
A number of homeowners New Era spoke to found themselves completely overwhelmed and unable to cope with monthly instalments and still pay off other accounts and other living expenses.
An argument mooted by Government employees, involved Government, trade unions, as well as the Government Institutions Pension Fund (GIPF), and even the Social Security Commission (SSC) to step in - in some way - to assist Government employees to cope with their housing debts.
The pleas of homeowners remain the same: they need the stranglehold caused by increased prices all round to ease up so that they can still hold on to their assets, and in particular, their houses.
"I saw in a newspaper last week that seven households stand to lose their houses because they have defaulted on their loan repayments," called in a civil servant from Mariental, Kaninga Kaveta, who himself stands to lose his house if he fails to come up with the balance owed to his bank.
He claimed that the pension money accrued with the GIPF over a period of 18 years in government service, is far more than his outstanding balance on his housing loan.
"Why should my money lie with the GIPF while I stand to lose my house over a couple of ten-thousands? How can I live poor and without a house if I have more than enough vested in the GIPF pension scheme?"
Others have suggested that banks ease up on repayment prerequisites, while the Bank of Namibia (BoN) is on record for expressing concern over the "very high" increases in housing prices.
And by all accounts, things are not likely to ease up. At least not this year.
Contrary to widespread perceptions, however, various commercial banks have indicated that the default rate on repayment of home loans has remained negligible despite the harsh economic climate.
Bank Windhoek indicated that between three and four percent of the total home loan clients "occasionally" fall behind their monthly home loan instalments.
"However, usually remedial action is taken before it reaches the point where the bank has to take legal action against the client," said Riaan van Rooyen, Head of Corporate Communications and Social Investment with Bank Windhoek.
Nedbank Namibia also indicated that there have been no significant increases in defaults.
Both these banks attribute this positive trend in the market circumstances to a thorough loan appraisal process, a credit policy that ensures that clients can afford the monthly instalments on their home loans, and an effective arrear management system.
Nedbank Namibia acknowledged that low and middle-income groups are taking on more stress when it comes to down payments of loans, while the more affluent market seems not to be affected much.
The mortgage-lending rate increased from 12.5 percent in December 2003 to the current 15.25 percent.
Nedbank Namibia said that the interest rate - in all likelihood - would not decrease, but rather go up by 50 basis points - that could affect an increase to something in the region of 15.80 percent.
But beyond the foreseeable future, it is anticipated that the current harsh economic conditions will ease up.
But what determines these interest rates?
BoN explained it as follows: Countries create a policy to help stabilise prices, meaning to keep inflation in check. Such a policy has to ensure that money supply is neither too small (causing interest rates to decrease) nor too large (causing interest rates to rise).
The BoN as the central bank influences short-term interest rates, money supply and credit to achieve its objectives conducts this monetary policy.
The BoN uses a bank rate that influences monetary conditions in the country.
This is the interest rate at which commercial banks borrow from the BoN, and this in turn affects other interest rates in the economy, the BoN said.
"Changes in the bank rate induce commercial banks to also change their rates (for example prime lending rate) in the same direction and through that the BoN is able to regulate the supply of money to the end user (both individuals and businesses)," BoN stated.
"Increased interest rates might be painful in the short term, but one should bear in mind that in the long run the intention is to cushion consumers from higher inflation which has a tendency of eroding their incomes. The flip side of the coin is that higher interest rates provide opportunities to depositors or savers to earn better returns on their investments," BoN said.
Home loan interest rates are determined by the cost of funding for the bank, where the bank rate (the rate at which money is made available to commercial banks by the BoN), as well as capital adequacy requirements as set by BoN, being a determining factor, explained Van Rooyen.
Interest rates, he said, are also closely linked to the risk associated with a particular transaction.
As far as questions regarding the formula for repayment are concerned, Van Rooyen responded that it is rather basic.
Motor vehicles are normally financed over a maximum period of 50 to 60 months - as prescribed by law - while home loans are usually financed over periods of 20 years and longer.
"This is in line with the needs of the client and his/her repayment ability," said Van Rooyen.
A longer repayment period, he said, would decrease monthly instalments, and "thereby positively influencing the client's monthly cash flow situation".
Conversely, this means less interest should the client decide to pay off the loan over a shorter period.
On the question of the intervention from the GIPF, Corporate Communication Manager for the institution, Elvis Nashilonga, said: "The GIPF as a fund was not established to provide solutions to home loans, but rather to provide solutions for retirement."
But the GIPF has considered a GIPF home loan scheme four to five years ago, specifically with civil servants in rural areas in mind where banks would normally not consider giving loans in unproclaimed areas.
The government is still considering the feasibility of this scheme - and cautiously so, said Nashilonga - because if the budgetary implications for the government.
"The moment you open up the pension savings to be used somewhere else without due consideration, people can end up using their pension monies and by the time of retirement, they would sit with nothing left to lay their hands on," cautioned Nashilonga.
And if such loans are given at the market rate, they can still remain unaffordable to many.
"And if you give the loan at a below-market rate, will you be addressing the plight of people in need?" questioned Nashilonga.
But the Pension Fund Act does allow for GIPF housing guarantees, but Nashilonga said so far this relates to funds for the purpose of either renovating an existing dwelling, or to build a new dwelling.
"Although that has to be done within the parameters of the Act, stakeholders still have to agree how this is to be implemented," added Nashilonga.
For homeowners to keep their heads above water, the short answer to their repayment woes is prudence, suggested the banks.
Stay clear of unnecessary usage of credit cards and micro financing, and live within your means.
"Buying a house is not just a matter of 'What can I afford?' Instead, it is a long-term commitment for which the client should rather ask, 'What can I afford on a sustainable basis?'" said Van Rooyen.
Monthly instalments should not exceed 25 percent of clients' monthly gross income and clients should speak to their banks pro-actively should they find it difficult to fulfil their monthly instalments on existing home loans.
"In most cases a solution can be reached should this communication take place timely and pro-actively," he stressed, adding: "As a rule it is always better to pay the loan quicker than required, if the client can afford it."
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