Shock for ABSA Home Loan clients

Shock for Absa home loan clients
Oct 16 2008 08:47 Elma Kloppers

Johannesburg - Of Absa's home loan clients, 130 000 or less than 17% will be affected by the decision to restrict access to the equity (own capital) in home loans.

The equity in a home loan is the difference between the outstanding bond amount and the original loan.

The decision resulted in shocked Absa home loan clients on Wednesday threatening to either move their bonds to other banks or withdraw the equity from their home loan accounts.

Responding to the uproar, Gavin Opperman, Absa's group chief executive for securitised loans in the retail division, explained that the economic climate left the bank with no choice other than to tighten its lending criteria in line with the regulations of the National Credit Act.

He said Absa's decision applies only to customers who use the 261 Flexi facility. Those using the 264 Flexi facility for access to capital will still at all times have access to it. These are clients who have paid a lump sum into their bond account.

Those affected will include clients who merely pay their instalments each month, but now need cash and want to draw some of the capital that they have built up via the 261 Flexi facility. In such cases clients will now have to apply and, in terms of Credit Act criteria, have their ability to repay the debt assessed.

Opperman says where the risk comes in is when these clients begin to nibble away at the money they have already paid off, while the term of the loan has not been extended. This means that their monthly bond instalments will increase because interest rates are high, and clients will consequently fall deeper into debt.

Those who have paid more than their monthly instalments will also in future also have to apply for access to their capital.

They will not, however, have to comply with the credit criteria. Opperman explains that the reason for the decision is that the bank is attempting to reduce future risk for both clients and itself, with all indications being that the housing market is in for an exceptionally difficult 2009.

The current cycle will continue for much longer than expected and it's better to take these prudent steps now, he adds.

- Sake24