SA Lending Criteria – The National Credit Act
National Credit Act
The purpose of this act is to promote and advance the social and economic welfare of South Africans, promote a fair, transparent, competitive, sustainable, responsible, efficient, effective and accessible credit market and industry, and to protect consumers.
Objectives of the National Credit Act
- Promote black economic empowerment and ownership within the consumer credit industry
- Prohibit certain unfair credit and credit-marketing practices
- Prohibit reckless credit granting
- For debt re-organisation in cases of incidental matters
- Promote responsibility
The new National Credit Act of South Africa came into affect towards the middle of 2007, compelling the banks to ensure that their mortgage clients do not over extend their credit limit. Previously, the bond repayments were not to exceed 30% of their proven dependable income. The new act now makes the banks legally responsible for checking the applicant’s full credit situation.
Upon bond application, clients will be asked to declare their income as well as their expenses. With the new act, the banks will have to be fastidious about ensuring that the client has declared all debt, for example, car repayments, credit cards, retail accounts and any other debt the client may have: if they have another home loan; or a rental agreement (where applicable) it will also be regarded as a mandatory requirement.
Investors who invest in off-plan purchases may find it difficult to obtain finance if they have mortgages with other financial institutions, thereby making multi-property ownership more difficult to secure. The simple answer to obtaining mortgage finance, is to ensure that your finances are in check as this will enable the bank to make a quick assessment of your affordability.
The interesting part about the new act is that if a bank does allow a borrower to over extend on their credit after disclosure of their financial situation, the bank could be sued by the borrower should the debt result in the borrower not being able to repay the debt, as well as incurring a possible fine for contravention of the act.
It also works in the bank’s favour. Should the closure from the borrower not be accurate, the property could be repossessed and the client blacklisted.
What the Credit Act means for you!
There’s no denying that credit is a good thing. It gives you that extra edge when you want to buy those things that have always been out of your reach. Without access to these additional funds how would you afford that dream lifestyle?
The problem comes in where debt can quickly spiral out of your control. So the trick is to, manage your finances and only borrow what you can afford!
Is the new Credit Act causing people pain – or is it in saving them from future debt?
Banks will not decline people more now that the new credit act is in place, they would just price it better for increased risk. With residential property sales plummeting, South African real estate agencies are preparing to secure the hatches for what could prove to be a stormy next twelve months. Larger real estate agency groups are also finding they are increasing market share as consumers prefer more established brands in these difficult times.
Some estate agencies view the new credit act as new opportunities that are opened up. Some will always react to a downturn by going into hibernation, downscaling and retrenching, but it is often those who follow this route that often struggle to get back to their previous position.
However, there has been a lot of consolidation in the market place, indicated by smaller agencies and offices closing up and moving towards larger established companies. Cut overheads as far as possible, bunker down and work through the next 12 difficult months.” The only way to survive is to ensure overheads are kept at a minimum.
It is hopeful that we should expect to see improvement “fairly soon”, particularly in the final quarter of this year. The fact that more sellers are going to have to, or need to, sell more buyers are going to see value in buying opportunities. That will get transactional volumes going again. It is not anticipated that prices will begin to escalate until the mid-2009.
Home loan credit applications are taking longer to approve and there has been a slight lull in terms of home loan grants of late, but that’s due to new systems that the banks have been putting in place and new procedures that they have to follow to get things through credit and to the lenders. Take into account the bond term you apply for. The typical bond loan is over 20 years, but bonds of up to 30 years can be obtained, in which case your monthly costs will be lower but your debt over the longer period would be considerably greater.
Another thing to remember is the total cost of the buying transaction fees involved i.e. transfer duty, bond registration and other costs. Before you commit to a property, be sensible: first establish the availability of bond finance based on your credit status.
Don’t just go and sign that Offer to Purchase even if it’s on condition of sale of your existing property and obtaining bond finance until you know where you stand in terms of financing your property. It all sounds pretty elementary but believe it, when you’re in the Heat of Passion’ buying that always dreamt of property, it’s amazing what you will overlook!
Make sure you do your ground work and ensure you speak to someone that knows what they are doing!
It’s basically going to come down to the banks assessment of the risk of the borrower in terms of the ability to finance the bond.
The various stakeholders in the industry should apply certain strategies. Sellers should not delay. The price you receive now will buy a similar standard of property, provided the sale date and purchase date are not too far apart. In other words, the buy/sell market pricing mechanism balances out.
Courtesy: Agent – The Official Publication of the Estate Agency Affairs Board
“Redressing the Past, Building the Future and Guiding the Real Estate Business towards Professionalism”