Finbond Family
Finbond Group Limited™ |
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| National Credit Act (NCA) |
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What the NCA means to you Good news for consumers is that the NCA has been fully implemented from 1 June. The Act mainly focuses on protecting you from reckless lending by credit providers and preventing you from overexposing yourself to debt. Your rights In terms of the NCA, you have the right to:
In addition, the Act stipulates a maximum interest rate, and prohibits penalty fees when you cancel a contract, although a cancellation fee may apply. Check your credit status The Act also requires that credit providers register information about all credit agreements on the National Register of Credit Agreements. When you apply for credit, credit providers will use this information to determine if you will be financially capable of repaying the debt. Transunion, one of the country’s credit bureaus, offers you a free credit report in the month of your birthday, by visiting www.mycredit.co.za. This allows you to make sure your credit details are correct, so you do not run into problems when you apply for credit. Dealing with the paperwork The NCA will unfortunately make life a little more difficult for bond applicants, as banks are required to conduct more thorough financial checks before approving bonds. Bond applicants will have to provide full disclosure of all income and liabilities and will have to earn up to three times their monthly mortgage repayment. In terms of income, salaried employees will have to produce evidence of earnings for the last three months, while self-employed individuals will need to prove earnings for the last six months. On the expenses and liabilities side, all credit cards, limits and repayment rates must be declared, along with details of all retail accounts and repayment schedules. Existing home loans and the rates on these must be revealed, along with details of monthly expenses for everything from domestic servants, clubs, travel expenses, rates, taxes, water, electricity and more. Where the extent of the paperwork for a home loan application was daunting before, it now has the potential of becoming quite frightening. Empowering you However, the Act will go some way to ensure South Africa sees a new breed of customer, empowered to understand and question their credit status, the confidentiality of their information and the credit agreement they are about to sign. Your NCA questions answered Following our recent Intranet poll, and as a different take on the much-debated National Credit Act (NCA), we answer some of the questions raised at a recent investor’s seminar held in the Nedbank executive dining room. Our recent Intranet poll regarding the impact of the NCA yielded some interesting results. We asked the BondExcel Community, “Do you think the NCA will affect the homeloan volumes negatively?” The majority of the BondExcel Community felt that the NCA will not negatively impact volumes, while 32% of those who responded to the poll felt that it would. As Jack keeps reminding us “Don’t panic, but credit will never be the same again”. However, how we approach these changes will be the factor that makes the biggest difference. “I really believe that if we are negative about the impact of the NCA, it will become a hassle and make our lives miserable. If we are positive, we will get what we deserve,” says Jack. Jack provided some answers to a few frequently asked questions. How will the NCA impact investors and speculators? The NCA attempts to prevent reckless lending. In that sense, it is geared towards the lower income sector of the market. It will, however, also impact the more affluent sectors such as investors and speculators, because it will curtail the ability to gear beyond the point of affordability, as determined in the mind of the credit manager. My expectation is that this impact could be quite extreme in the beginning but will temper in the medium term. Give it about six months, and credit lending will revert to what we today consider normal. Will it be an obstacle to buying more properties? As stated above, you may experience medium term obstacles with regard to your ability to gear, but over time the situation will improve. My advice is to use this time to deplete your debt as far as possible. Will it hamper me in my quest to become financially free? Financial freedom should be measured not by gross asset worth, but by net asset worth. Whilst financial freedom does not mean an absence of debt, it does mean the presence of your income target. Highly geared and simply paying off debt, no matter how many flats you may own, is not financial freedom. As stated before, use this time to settle some debt. What are the main elements that will directly impact me as an investor or speculator? The only real issue in a market as mature and trustworthy as the homeloan market is the issue of affordability vs. gearing. Remember that it could be time for us investors to seriously motivate our applications. What I mean by this is that previously we have allowed the banks to only consider a portion of rental income as income in their repayment to income (RTI) decision. We may now have to confirm vacancy rates and show 12 month’s of signed agreements to enable the bank to be more realistic regarding sustainability of income. How will the home loan approval process change? Apart from terminology (for example, formal grants will now be called quotations), the homeloan process is only really affected by the requirement of the NCA that banks phone clients to explain the quotation to them. My suggestion is that you try to delay this process until one quotation has been ‘bank selected’ on the system. How will banks assess my affordability after 1 June? After 1 June, the principle of 30% of joint gross monthly income continues to apply when the banks assess affordability. However, the banks will now insist on a detailed income and expenses statement and therefore bring personal disposable income into the equation. The banks have not developed a generic approach to this latter number, but my sense would be that, as a guideline, your payment should not exceed about 50% of personal disposable income. We will have to wait for the banks to structure their process through their experience of the Act. What fees will change and to what extent? The only fees and charges that may be levied are an initiation fee (R1 000 per agreement, plus 10% of amount in excess of R10 000, never to exceed R5 000 or 15% of principle debt); a service fee of R50 per month; interest; credit insurance; default administration charges; and collection costs. What is interesting is that the banks have already begun to issue new pricing with regard to the R5.70 admin fee charged monthly. Refer to the Nedbank fee structure on the Intranet. Both Standard Bank and Nedbank have implemented different fees for clients who have their homeowners insurance included in their bond, and for those who have their own insurance in place. Interestingly too, the service fee of R50 per month excludes VAT, so the actual amount the may be charged is R57 – a small individual figure that will have massive implications on the banks’ side. The maximum interest rate, calculated monthly or daily in arrears, that may be charged on mortgage agreements is: Reference rate x 2.2 + 5% per annum = 9.5% x 2.2 + 5% *Repo rate currently at 9.5% = 25.9%* The maximum interest rates will affect lenders and borrowers significantly. Investors will be hard pressed to raise facilities but ultimately, this will strengthen the property economy because healthy lending is good lending. Developers, too, will be affected as speculators dry up. How will the National Credit Register work and how will it affect me? It will work with difficulty! I am hearing from various parties that this process and the technology behind it is under discussion and my sense is that it will only come into effect two years from now for new homeloans, and it will be five years before a complete register of lending including all individual transactions will be available. Will the Act shrink the size of the buy-to-let market? Not in the long term but the Act will have a medium term impact. Frankly, the rise in the interest rates, added to the rise in house prices, has already begun to shrink the buy-to-let market as a percentage of developers’ sales. The question to ask is: “Is rented residential property a valid investment asset class?” The answer, in my opinion, is “Absolutely!” NCA progressive and laudable Since its implementation in June this year, the National Credit Act (NCA) has been blamed for numerous trends evident in the economy. From the decline in motor vehicle sales and property sales, to the fact that housing is becoming less affordable, the NCA has been portrayed as the scapegoat in many media reports. “The current trends in the property market cannot be solely attributed to the NCA,” says Jack Trevena, MD of bond originator BondExcel. “They are the result of a number of factors, including the winter season, the increase in interest rates, and the NCA. These factors cannot be seen in isolation, nor can one factor be singled out.” Trevena explains that although the procedural issues relating to the NCA has caused some disruption in the market, and it may be more difficult for consumers to obtain credit and finance they cannot comfortably afford, the NCA will benefit the country and the credit industry as a whole. “In preventing reckless lending, the NCA will compel homebuyers and investors to motivate their applications for finance thoroughly and accurately. By preventing finance being granted to those who cannot afford it, consumers in general, the borrower and the financial institution are protected from the expensive and unpleasant process of defaulting and repossession.” The recent subprime crisis in the US indicated just how wrong things can go when reckless lending is allowed. The South African financial institutions and regulatory authorities deserve acknowledgement for their responsible approach to credit lending, which will go a long way protect our industry from a US ‘meltdown’ situation. “My expectation is that the impact of the NCA will seem quite extreme in the beginning but will temper in the medium term. Give it about six months, and credit lending will revert to what we today consider normal,” concludes Trevena. |