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

By choosing Mortgage Plus for a loan, you will get that continual service to make sure you are getting the best deal possible.

CONTACT US

Speak to a home loan consultant about financing your new property or reviewing your existing mortgage. We are able to assist in lowering your bond repayments and securing attorney discounts.

Complete this short form online
Call us on 011.327.4489
Email: morne@mortgagepluscc.co.za

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Although right now may be the best of times to purchase property, it certainly is not the easiest of times to secure a bond. During times like these an experienced bond originator could save the day.

The banks have become increasingly skittish about extending credit to consumers. And this includes ‘traditionally safe’ forms of credit, such as home loans.

The three main instigators that are party to the banks’ growing uneasiness about the mortgage market are: the household debt to personal disposable income ratio; the poor growth in house prices; and the National Credit Act.

1· Household debt to disposable income increased. In effect, this means that many households are either over indebted at present or finding themselves very close to that unwelcome position.

2· The National Credit Act placed the over indebtedness monkey squarely on the backs of the banks. If a bank extends credit that directly results in a consumer becoming over indebted, the bank can be sued for what the Act terms ‘reckless lending’ by the affected consumer. The checks and balances to ensure that this is avoided, are stringent and contributed to 50% of the home loan applications lodged being rejected.

3· To exacerbate matters, the property market has not been performing well of late. Some areas have even started showing negative growth (in real terms)., This means that the properties in those areas may no longer serve as sufficient collateral to cover the loans originally extended to the property owners. In response, three of the big banks have changed their Loan to Value guideline percentages, making it very difficult to obtain a 100% home loan.

Given the above, you would do well to secure the services of an experienced bond originator. It will help you to better stack the odds in your favour:

Bond originators typically have a banking background. This means that they have a good end-to-end understanding of the evaluation and approval processes followed by the banks’ mortgage departments. They usually know who is who in the banks that they represent, which could sometimes come in handy.

Bond originators can help you pre-assess whether you are likely to qualify for a home loan and calculate the maximum amount you will be able to apply for. To do this, your bond originator will probably ask you to provide some personal details, employment information, a list of your assets and liabilities and a list of your monthly income and expenses. If you are comfortable with providing your bond originator with a copy of your credit report, it will help them make an even more accurate assessment of your situation.

Bond originators work with multiple banks. Once you have found a home you would like to buy, the bond originator will lodge the necessary paperwork (application and supporting documentation) with all those banks that are likely to approve your application.

Bond originators tend to secure the best interest rates. When dealing with banks as an individual, you are less likely to achieve the same discounts as a bond originator typically would. Realising that your bond originator will have approached multiple banks, the banks usually give the best discount possible for your profile fro the outset.

Bond Originators remain involved until all the paperwork is done. Instead of leaving you to your own devices once you crack the nod from one of the banks, the bond originator will continue assisting you until the deal is legally and officially done.

Bond originators’ services are free. You do not pay for your bond originator’s services, the bank does.

To conclude
The services of an experienced bond originator in times like these are essential. They understand the current dynamics of the banking industry; they know how to navigate their way through the application processes; and they are fully aware of what is needed to ensure that your application is successful in the end.

By choosing Mortgage Plus for a loan, you will get that continual service to make sure you are getting the best deal possible.

CONTACT US

Speak to a home loan consultant about financing your new property or reviewing your existing mortgage. We are able to assist in lowering your bond repayments and securing attorney discounts.

Complete this short form online
Call us on 011.327.4489
Email: morne@mortgagepluscc.co.za

www.mortgagepluscc.co.za