Property finance: NCA not only problem

The National Credit Act (NCA) has put a dampener on property buying and selling, but it is only one part of the bigger property financing problem.So says John Loos, property economist at FNB, who adds that he is doubtful that the NCA is the major brake on the housing market at present.

“I think that a lot of banks’ tight credit criteria has to do with the very risky period that we live in currently, and not merely because of a law that requires it. The reality is that there has been a lot of bad debt around which has hurt the home lending sector, the household sector’s financial condition following the recession is not healthy, and the world currently faces the risk of a double-dip recession, which would have a big impact on the household sector’s financial situation again were it to materialise.

“NCA or no NCA, the current economic times arguably make conservative lending policies suitable, and I doubt that much would change right now were the NCA to be instantly dropped. It isn’t as if the household sector has low levels of debt. To the contrary, the levels of indebtedness are generally high by historic standards.”

He says the NCA still has use in promoting responsible lending, “but it would probably have more of an impact on lending levels during good economic times when lenders instinctively want to be more aggressive”. “Currently the risky economic times mean that lenders don’t need much encouragement to be relatively conservative.”

“I think, though, that SA – along with some other Western countries – need to begin to look at something more troublesome than tight lending criteria, and that is our household sector’s high dependence on credit, especially credit for consumption purposes.”

Lew Geffen, chairman of Sotheby’s International Realty in SA, says the rich in SA’s property market are getting richer while the poor get poorer because of the way the NCA is being applied.

“The wealthiest homebuyers – or actually those considered most creditworthy by the banks – often don’t actually need bank finance, and so are able to upgrade and invest now at good prices which will enable them to gain maximum advantage from the next market upturn.

“But the lack of access to credit because of the way the banks are applying the NCA is shutting poorer buyers – or rather those with smaller cash reserves – out of the market and denying them the opportunity to build wealth through home ownership.

“In fact, the door has not just been closed on them, it has been slamlocked, and the worst affected are black buyers who can afford monthly bond repayments, but have not had time to build up extensive credit histories or asset bases that would make them better risks in the eyes of the banks.”

In 2007, he points out, at least 25% of home sales by his company were to newly-wealthy beneficiaries of BEE. “But after the introduction of the NCA in 2008, the percentage of black buyers in traditional suburbs dropped back to 15% and now we are back at 5% – which is where we were in 1994, just after the first democratic election.”

Geffen says that in previous property cycles, low property prices and relatively high rentals always signalled an upturn in the property market as tenants realised that they could afford the monthly bond repayments on a home of their own just as easily as the rent they were paying.

“But this is not happening this time around. Although there is enough demand to send the market back into a boom phase, the process is being blocked by the banks using the NCA to discriminate in borrower selection, and many people who could quite well afford to become homeowners are being forced to remain tenants.”

He hastens to say that he supports the idea of homebuyers having equity in their properties in the form of deposits, “but I also believe there should be one set of rules for everyone”. “At the moment some people are getting 100% bonds at lower interest rates while others are only able to get 70% bonds at higher interest rates.

“This is akin to the notorious redlining practices of the 1980s and 90s, the only difference being that the focus now is on keeping certain borrowers out of the lending picture rather than certain areas. And it is hardly what was intended when the NCA was introduced, which was essentially to protect consumers from unscrupulous lending practices.”

Loos says the problem in SA is not low levels of borrowing but, rather, high levels of borrowing and low levels of saving. “We don’t have nearly enough national saving to fund our huge fixed investment requirements, and household saving is definitely the weak link here (with government saving also being troublesomely low). And so, not surprisingly we have under investment in infrastructure, and the cracks are showing all over the place. And so, the savings shortage places huge constraints on SA’s long term economic growth potential, and thus its job creation potential.”

He says banks, by tightening up on lending in recent years, have merely unintentionally exposed SA’s weakness of low savings.

“By requiring deposits again on home loans, SA’s savings shortage has been highlighted by the many people who don’t have the cash on hand for the deposit required. Is the ultimate solution to lend more or somehow encourage more household saving? I think the latter would, in principle, be the real solution to the problem. I have to admit that the solution to the savings shortage is a complex one, and don’t have all the answers as to how this would be achieved, but merely making credit more available definitely isn’t the solution.” – Eugene Brink

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Banks start to ease up with bond applications

WITH banks beginning to relax their lending policies, there is support for a revival in the property market and now is the time to apply for a bond.

There should be a much-improved chance of being approved for a loan on favourable terms. Banks are again offering 100 percent loans and the current lower interest rates make it a better time for consumers looking to buy.

Before you even apply for a loan, check whether the property is affordable.

Determining the right price range is an essential first step to avoid wasting time looking at unsuitable properties.

A property finance consultant will take you through the exercise of establishing what you can afford, taking into account your specific financial requirements.

Monthly repayment affordability is generally calculated at 25 to 30 percent of joint gross income, but other criteria, including existing debt commitments, may affect the size of the loan that the bank will grant.

Remember that the hidden costs (transfer and bond registration fees) usually have to be paid up front and add a sizeable amount to the cost.

One way to ensure that the loan you apply for will be granted is to get a prequalification. Companies such as Mortgage Plus will, at no cost, prequalify you for a certain bond amount, which takes the stress out of applying for a bond once you have decided on buying a property. Another positive factor is that buyers who are prequalified are in a much stronger position to negotiate with sellers.

Bond applications may be declined for several reasons: you may not be able to afford the monthly loan repayments, or may require a 100 percent loan that would push the repayments beyond your reach.

Another critical consideration is your credit profile. This includes your employment history and consumer bureau results, which provide a picture of your debt and payment history. If the bank considers you a good credit risk, it will assess the value of the property to be purchased.

If this, too, meets all the relevant criteria, the loan is usually granted. The mortgage originator also often motivates the merits of a particular loan application to the bank’s credit manager.

To improve your credit record, cancel out-of-date credit cards and ensure that you pay all instalments by the due date every month.

To help the bank determine its risk, you will have to provide personal information such as bank statements, salary slips, a statement of assets and liabilities, a statement of your monthly expenses and information on your credit history, including whether you have ever been insolvent.

An originator can ensure you have all the correct paper work to avoid unnecessary delays.

Mortgage originators shop around and negotiate the best deal for customers for free. Obtaining a preferential rate of just 0.1 percent below prime can make a big difference to monthly repayments. But a mortgage originator must take more than just the rate into account and will structure a package to suit an individual.

To structure a package to suit an individual needs please phone (011)327-4489 or go to www.mortgagepluscc.co.za