Changing dynamics in the South African home loan market, shifting consumer behaviours, and strides in digital transformation will push the industry into new territory in the coming year, says Grant Phillips, Group CEO of e4.

The economic environment up to now has certainly not been easy. The artificially low interest rates during the pandemic created a credit boom, and as rates increased, the financial pressure on consumers mounted. Borrowers who took on credit at low rates found themselves struggling, leading to the market becoming far more cautious with understandable apprehension around issuing new credit, as lenders remained wary of the risk of non-performing loans. All this, in turn, impacted consumer confidence which is only now beginning to show signs of optimism. The good news is that those who have weathered a challenging 24-month trading period have an opportunity to take advantage of the headwinds turning into tailwinds as market conditions improve.

Bond switching is here, and here to stay

One of the most notable developments is the rise in bond switching. Unlike in the UK and the US, where switching bonds multiple times over the life of a home is common, South Africa has traditionally seen little of this behaviour. That’s changing, largely thanks to new players in the market targeting prime customers with incentives to make the switch.

The shift is changing the way consumers think about their home loans. Where once a bond was seen as something you held onto for life, more and more South Africans are now shopping around for better rates and terms. Over the past six to nine months, there’s been a marked increase in bonds being switched that aren’t linked to new home loan transactions. This is something that lenders, historically, have never had to deal with, as very few, if any, have considered re-pricing consumers who have been diligently paying down and servicing their bonds for 10 years or more. But lenders are now realising the need to retain these lower-risk customers who have proven themselves over time but haven’t benefited from their improved risk profile.

The costs associated with property transfers, such as bond cancellation and re-registration fees, have traditionally been a significant barrier to switching for many consumers. This may also start to change to a point where lenders absorb these costs, particularly in cases where the loan-to-value ratio is low, and the risk to the bank is minimal.

The biggest question facing the market is how quickly it will bounce back. We’re seeing signs of improvement in consumer confidence, and the start of a rate-cut cycle is undoubtedly encouraging. However, it will take time for over-indebted consumers to regain stability. Rate cuts, while helpful, won’t provide instant relief for those already in financial distress. Still, those consumers who can manage their debt are in a much better position as rates continue to decline, and banks are likely to view these individuals as valuable clients in the months and years to come.

While there is a lag between policy changes and consumer behaviour in the sense that interest rate cuts won’t immediately lead to a surge in spending, as we’re likely to enter a sustained period of rate reductions, especially if we get to another 75-100 basis points off where we are currently, consumer sentiment and spending should follow suit. Encouragingly, foreign direct investment is also on the rise, signalling growing international confidence in ‘South Africa Inc.’, and this will further boost market recovery, which can be seen by the growing number of international buyers investing in both residential and business properties in South Africa.

Where to next?

Looking forward, improving affordability will be a key driver. With inflation back at manageable levels, we are optimistic about further rate cuts and increased market stability. The trend towards bond switching looks set to continue, driven by consumer awareness and more competition among lenders. In addition, digital automation will come back to the fore in much more meaningful ways, putting an end to the trend of digital transformation projects being on hold due to broader financial pressures. As conditions improve, there’s likely to be a renewed investment in these initiatives, allowing financial institutions to reap the rewards of enhanced efficiency that ultimately lead to better customer service.

The focus at e4 remains on diversification. We have built capabilities that aren’t limited to property but can be applied across multiple sectors, from insurance to investments. The financial services industry in general stands to benefit from providing a single experience of the customer together with a single view of the customer – something that is becoming increasingly important for all players in the market. Technology inefficiencies and architectural infrastructure challenges have made it very difficult for institutions to achieve this and get a holistic approach to unlocking more value from the end customer.

Digital document generation, electronic signatures, data verification, and automation capabilities have applications across all industries that deal with high volumes of documentation and can deliver significant value for sectors that might still be playing catch up in the digital age.

Pioneering strategic partnerships

This year, e4 achieved full coverage of the home loan market in South Africa thanks to onboarding one of the country’s largest banks and a partnership with another digital-first bank. Now, all traditional bonded home purchase transactions in the country touch the e4 ecosystem in some form. This milestone creates the infrastructure that the entire industry can build upon and where we can take the best practices from every corner of the market to enhance the sector as a whole. e4 has created a compelling blueprint around how to layer in value for lenders, conveyancing attorneys, and ultimately their clients as well.

The value of strategic partnering is highlighted when the going gets tough, as it has been, and we’ve been able to provide solutions and insights to ensure that when the market turns, our clients are in the best position possible to take advantage of the upturn. We see our partnerships as leading change in the market and actively playing a role in what comes next. The benefits of digitisation are yet to be fully realised across a number of industries. Organisations that adopt digital solutions are simply better placed to create ecosystems that are more efficient, more transparent, and ultimately more rewarding for all stakeholders.