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Should banks issue mortgages without ‘down payment’?

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Most local banks do not offer mortgages without ‘down payment’, or simply put, financing mortgages 100%. A website called, thetruthaboutmortgages.com, which is managed by Colin Robertson, a former account executive for a wholesale mortgage lender in Los Angeles, indicates that it is difficult to find mortgages without ‘down payment’ as banks and mortgage lenders have tightened pre-qualification requirements as a result of the financial crisis that ensued and affecting badly mortgage lenders.

 
It said the reason banks require a larger ‘down payment’ nowadays is because properties do not appreciate at the rate at which they used to, in fact, in some parts of the world, it is said; properties are steadily losing value and shifting risk to the lenders.

 
“And if homeowners don’t have equity, there’s a better chance they’ll walk away from their mortgages if they fall behind on payments, leading to costly foreclosures. Conversely, if a homeowner is required to put down say 10 percent of the purchase price, the lender has a safety buffer, and the homeowner is more likely to continue making payments, as they won’t want to lose that initial investment. Put simply, the lack of 100% financing is probably a lack of lender confidence with regard to the direction of home prices. Once things improve, we’ll probably see a lot more zero down stuff making its way to market again,” states the website.

 
Locally, Standard Chartered Bank Botswana (SCBB) is rumoured to be toying with the idea of 100% mortgage financing. Gazette Business has not been able to confirm this because a questionnaire that was sent to SCBB by this publication a month ago has still not been responded to. But what are the pros and cons and even risks associated with 100% mortgages financing?
In an interview with this publication, Property Finance and Investment expert, who is also Chief Executive Officer of Vantage Properties, Sethebe Manake applauded the reported move by the bank, saying it was a great step. She said it will be an advantage to consumers looking at the fact that; “we don’t have a saving culture and planned investing.”

 
The expert said customers will have the opportunity to acquire mortgages easily and more people will be able to afford to buy property because they will no longer be required to have a deposit in order to access mortgage loans. She, however, said this would perpetuate the habit of not having planned saving and investing.

 
On the lenders’ side, Manake said; “The financiers take all the risks of whether the properties perform or not, and whether the property owner is able to pay or not; if they are not able to pay, it will be entirely on the financiers to see how they get their money back.” She also noted that the banks would take the property circle risk. “I hope they take a long term view on what and who they are financing, there will be ups and downs, and they should be prepared for either,” she said, further highlighting that in the process the nation will not accumulate any equity on property since they will be investing on debts.

 
Financial market analyst, Karabo Tladi of Blackthread, said it would be interesting to see how the bank will finance the 100% mortgage at the time when the banking sector is experience liquidity challenges. He concurred with Manake that the move would help most Batswana to own houses “without having to pay huge amounts of deposits.”

 
“From a bank perspective, because most banks don’t offer 100% mortgage financing, the bank that is offering this unique product will obviously experience increased loan book growth going forward. The good thing about mortgage financing is the fact that it’s a secured loan. When the borrower is unable to pay the loan, the bank can sell the house and recover their money,” he said.
Tladi also reiterated Manake’s view that the move would be risky for the bank “because the bank is taking on the whole risk of financing a house without the customer taking any kind of risk. If the customer defaults on payments, the bank can suffer big losses. Another big risk is that mortgage financing is reliant on the housing market rising. Remember the 2007-2008 financial crisis in the U.S. It was caused by falling property market in the U.S. This caused the banks at the time, which had huge mortgage book to apply for bankruptcy. Banks balance sheets declined significantly because of declining property prices.”

 
Quizzed to give his view on why would banks now move into financing mortgages 100%, Tladi said banks would do that to encourage home ownership and at the same time growing their loan books.

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