Although it is common knowledge that the profitability of South African banks has taken a hammering since the late 2008-2009 global financial slump '“ and that risk ratings for bank clients have been drastically tightened as a result '“ many 'low risk' bondholders who before the downturn were given bonds at anything up to 2% below prime have not yet realised that this is highly unlikely in todays credit market.
This was said recently by Rob Lawrence, National Manager of Rawson Finance.
'Consumers forget that prime is just a yardstick that banks use to judge risk and that the banks risk in this market has increased commensurably. The price of money, which is a banks trading commodity, has had to be increased'
'There has,' said Lawrence, 'been ongoing press publicity about the stricter lending criteria but buyers who now apply for bonds and who are still earning well are understandably very frustrated when they find that their risk rating has been downgraded and they can get either no discount or a very low discount, such as 0,5% on prime.
'The plain truth, however, is that today any discount on prime represents a fairly generous concession on the part of the banks'
The position of the average bond applicant, said Lawrence, is that 45% will still find their applications rejected and those that are approved can count themselves fortunate if their bonds are awarded at 0,5% or 0,75% below prime. High risk applicants '“ those with a poor debt or employment record '“ may well find themselves paying 1 to 2% above prime.
Certain jobs, some of which were previously regarded as '˜safe and certain industries, said Lawrence, have now been rated on risk by the banks.
'For example, any person in construction, the motor trade, in airlines or luxury extra services such as interior decorating, will now find it harder to get a bond '“ as will any person who is self employed. In fact, self employed people have never found it more difficult to get a bond '“ even if they have been earning well for a long period'
So '“ what can the aspirant bondholder do to increase his chances of securing a bond at the best available rate concession?
'Either take the time to shop your financing to each individual bank or use a bond originator,' said Lawrence. 'Reputable bond originators know the varying criteria and the varying interest rates to which banks work and they will often be able not only to secure a bond but to do so at a more favourable rate, because they have tried all avenues'
Lawrence warned that although it is commendable to build up a close relationship with the bank which handles your day to day affairs, this should not lead people to expect that they will give you the best bond rates.
'Often the banks will rely on the bond applicants loyalty to get him to accept a rate that is not really competitive,' said Lawrence. 'It will always be to the consumers advantage to find out what the market can offer him, as opposed to looking at one offer. If, after shopping around, the buyer finds that his bank is giving him the best deal, he will then have the peace of mind of knowing this'
