# Regulatory Compliance Category > National Credit Act Forum >  Credit Act's impact on home loans

## Eugene

There has been much speculation over the impact of the National Credit Act (NCA) on the Mortgage industry, with some estate agents even claiming that the NCA will push mortgage approval times from 7 days to two months. Nobody will really knows the full implications until after the 1st June and when the National Credit Regulator (NCR) starts to flex its muscles, but many of these claims are sensationalist scare stories.

The Act introduces new rights for consumers, as well as measures that allow consumers to make informed decisions before buying goods and services on credit. It places greater responsibility on the credit providers to refuse applicants credit if they cannot afford it, explain the reasons why the applicant has been declined, regulate the way credit bureaus do business, and explain in clear and understandable language what the terms and conditions of the loans are. 

The NCA is also aimed at a wide range of undesirable practices in the Credit industry, from lenders cold calling potential clients, to the interest rates they can charge these potential clients. It is a good bit of housekeeping that will protect the consumer from these undesirable practices, both before they have borrowed money and whilst they still owe money. Although it is aimed at the industry in general, it will have the largest effect on the lower end of the credit industry, where it will hopefully stem the abundance of credit available in the form of credit cards, store cards and cash loans. 

When it comes to the mortgage industry, the main impact will be to stop 'reckless lending' to individuals whom can't necessary afford it, but is there really any reckless lending at moment? If there is, it is certainly not intentional from the banks, they are the party that stands to lose the most from reckless lending Ã¢â¬â defaults on their loans. 

When an applicant applies for a mortgage, banks check the client's application form (on which the client signs as true and correct), their proof of income and then their bank statements to see that this income is coming into their bank account. Once the various checks have been made with the credit bureaus, the banks' credit manager then makes an assessment of the applicants' eligibility for the loan. All these checks are far more intensive for home loans than for any other form of credit transaction because the sums of money are far larger. The worst scenario for a bank is a client defaulting on their loans, therefore they perform every check they can to ensure the chance is minimised, the NCA's threat of allowing clients who have been recklessly lent to walk away with some or all of the loan is an unnecessary threat. Second to this, banks in South Africa are also far more conservative than their US or UK counterparts, and hence there is not too much worry about the 'sub-prime market crisis' happening here as the banks simply don't lend to that market. In my opinion the banks will have more to gain from the NCA as clients will be unable to 'hide' other liabilities when applying for a mortgage due to National Credit Bureau. 

Therefore, the NCA will lengthen the time it takes to get a mortgage approval, but only by a day or two. It will make it harder for those getting home loans that hide their other liabilities when applying to the banks Ã¢â¬â but then they shouldn't get the mortgage anyway. 

One of the major drivers of a developed economy is home-ownership; this ability to turn assets into liquid capital is one of the main contributors to American entrepreneurs, and their wealth. The NCA is doing the right thing by trying to restricted the amount of unsecured debt available to South Africans so that they can get onto the property market, and take out (good) secured debt.

Ian Wason: Property24  (http://www.property24.com/Property24...articleid=5261)

----------


## Dave A

The National Credit Act (NCA) has changed the way banks assess your home loan application, and you now have to do more to prove that you have sufficient after-tax income to meet your loan repayments.

And, because of the NCA's strict lending requirements, soaring house prices and steeper interest rates, you may have to take out a mortgage bond over 30 years instead of the traditional 20-year period to buy a home (see below "You'll pay more for a longer-term mortgage").

When you applied for a home loan before the NCA took full effect on June 1, the bank simply looked at your income when processing your loan application. The rule of thumb that the major banks used to determine the size of your loan was that your repayments should not exceed 30 percent of your gross income. This rule of thumb was not dictated by legislation. 

Now, in terms of the NCA, you will be required to provide the bank with detailed information about your monthly income and expenditure, and full details of your debt obligations. The bank will check this information against that held by the credit bureaus, and also assess your credit rating if you have other accounts at the bank.

The bank will then provide you with a quotation, which must clearly state the total cost of the loan, the loan amount, the type and amount of interest that will be charged, the loan repayment period, and details of any fees and charges, such as initiation fees, administration charges and licensing fees.

The quote is valid for five working days, during which time you can source other quotes from competing financial institutions. 

The NCA stipulates that credit providers can only lend you as much money as you can comfortably afford to repay. This means that credit facilities, including home loans, may not be extended based on your gross or net income alone but must also take into account your ability to repay the debt. 

The implication is that if you have only a few credit agreements to your name, you could qualify for a large bond, because you have more discretionary income, Gavin Opperman, the managing executive of Absa's home loans division, says.

On the other hand, if you have a high gross income but numerous credit agreements - such as vehicle finance and credit cards - as well as high monthly deductions - for items such as private school education, insurance, home security, entertainment and investments - you could end up qualifying for a smaller bond amount than you would have before the NCA was implemented. 

The NCA has also introduced maximum interest rates and initiation fees on home loans.

The maximum interest rate you can be charged on a mortgage bond is the repo rate (9.5 percent) multiplied by 2.2, plus five percent. This equals 25.9 percent a year at current interest rates. 

The NCA states that the maximum initiation fee for mortgage bonds is R1 000 an agreement plus 10 percent of the amount of the loan in excess of R10 000. The fee is capped at R5 000 excluding VAT (R5 700 including VAT). 

So, if you take out a home loan of R850 000, you could pay an initiation fee of as much as R5 700. Before the NCA took effect on June 1, you would have paid a fee of about R3 500, according to bond originator Mortgage SA. The charge of R3 500 would have included a property valuation fee, which the banks are no longer permitted to charge. 

If you had taken out a loan of R850 000 with Absa before the NCA was implemented, you would have paid R1 648 in valuation fees and a further R1 140 in initiation fees - a total of R2 788.  


In addition to the initiation fee, the NCA states that a monthly service fee of no more than R50 can be charged on your home loan. 

Previously, banks would have charged you an initiation fee each time you asked for a further advance on your home loan. But now, in terms of the NCA, banks may charge you an initiation fee for the first loan amount only.

You should shop around for the lowest initiation and service fees because the banks add them to the home loan amount, which affects your total monthly repayments.
more on Personal Finance here

----------


## Eugene

Great summary!

----------


## duncan drennan

I wonder if this could ever work in favour of the borrower. Let's say the borrower was a borderline case, IF the bank lent the money at a certain interest rate. If the interest rate was lower, the debt is more affordable, which means the borrower is more able to repay the amount. The bank can now lend the money (and therefore make a profit), and the borrower is able to get the loan.

Probably not going to happen, but it was just a thought that crossed my mind.

----------


## Eugene

Jesse H. Jones once said: *Ã¢â¬ÅOne of the greatest disservices you can do to a man is to lend him money that he canÃ¢â¬â¢t pay back.Ã¢â¬Â*

----------


## Dave A

Hmm. And then there's "Never a borrower or a lender be."
I forget the writer, but from memory the missive ended "and you'll be a man, my son."

----------


## Eugene

_Vini vidi vidictu sum_ - I came, I saw and I was conquered.

----------


## duncan drennan

The signs of stress that the NCA is introducing into the property market are beginning to show,




> Bill Rawson, head of Rawson Properties, told Moneyweb that about only 2% of mortgage applications connected to Rawson sales have been approved since the beginning of the month.
> 
> --
> 
> It will be a "lean period" for many in the property industry, he predicted, and could take about six months until banks "settle down".
> 
> The Reserve Bank governor, Tito Mboweni, will not need to hike interest rates again to cool consumer spending because the NCA is going to do this - and more, predicted the real estate boss. "The whole economy could suffer," said Rawson.
> 
> Full story on MoneyWeb


It will be interesting to see if the economic data (CPIX, etc.) is significantly impacted by the NCA.

----------


## Dave A

I was fishing for some sort of outside feedback on this very issue in my thread on Early signs of an NCA impact.

Although no-one that I've spoken to has given a hard number to the percentage drop - they're all *very* miserable. Property market and vehicle sales. The clients are there - they are struggling for approval.

This is going to bite even harder than I expected at this rate.

----------


## duncan drennan

MoneyWeb has been doing a number of investigations, and there is a common thread in them Ã¢â¬â if you are selfÃ¢â¬âemployed you are going to struggle, so start thinking about what your options are for when you need credit.

----------


## Dave A

Good grief. You can tell Steven Jones has only recently joined the ranks of the self-employed. The self-employed have *never* had easy access to credit except for the past few years. It's really back to normal in that respect.

Some of those interest rate quotes are truly shocking though  :EEK!: 

Having had considerable experience of banking's cautious nature, their reaction is not entirely surprising to me. But I've been looking at the risk side for banks quite closely now. I can't help feel we're in a stage similar to when the "new improved" LRA was introduced.

At first everyone thought it was near impossible to dismiss staff. Not true - it's not difficult at all. You just have to follow procedure. 

It's much the same with the NCA. Follow procedure and it looks like you're going to be OK. Not that far off business as usual, in fact. Now all we need to do is master that procedure.

In saying that, the one thing I think that _may_ be something of an irritant for banks are the debt-rescheduling provisions. Ultimately though, they'll get their money, just not necessarily as per original plan.

The other danger is gov decides to change the rules. There is some rather wide scope there. But if banking carries on with its current course, I suspect that gov is going to discover that dancing strikers aren't the only power group they need to pay attention to.

----------


## Eugene

> It's much the same with the NCA. Follow procedure and it looks like you're going to be OK. Not that far off business as usual, in fact. Now all we need to do is master that procedure.
> 
> In saying that, the one thing I think that _may_ be something of an irritant for banks are the debt-rescheduling provisions. Ultimately though, they'll get their money, just not necessarily as per original plan.


I agree with Dave on this one. The re-scheduling part (and the ignorance of our common law principles of the law of contract), might have serious implications on many business's cash flow. Sure, all companies make provision for extending periods of loans etc. BUT you can now have the scenario where a monthly instalment is being reduced to a fraction of the normal contractually agreed upon monthly instalment.

----------


## Eugene

The brighter side of the National Credit Act

Amid all the worry about the negative effect the implementation of the National Credit Act (NCA) is having on the property market, there is a bright spot - the likelihood that there will be far fewer deals cancelled for want of a home loan. Lew Geffen, chairman of Sotheby's International Realty South Africa, says the requirements of the NCA are such that in most cases it is taking far longer than before for buyers to obtain home loans.

"But sellers can take comfort from the fact that buyers are less likely to make frivolous, time-wasting offers now on the off-chance of getting a bond, and that deals are far less likely to fall through now once a buyer's loan has been approved. "This means they can confidently go ahead and shop for another property themselves." Indeed a bigger worry for the market now, Geffen says, should be the strong possibility of another interest rate increase in August.

"Another 0,5 percentage point increase would take the total since last year to 3 percentage points and could well be the 'straw that breaks the camel's back' - leading to a sharp increase in foreclosures and repossessions.
"Based on previous experience, we know that a 3 percentage point change in interest rates takes to cause a major shift in the market, and we're pretty close to that now - especially if fuel prices and inflation continue to rise, too."
Such a shift, he notes, could force many existing homeowners to try to sell to avoid foreclosure, flood the market with stock and put severe downward pressure on price growth.

"However, this possibility also highlights the positive side of the NCA, which will prevent people from becoming 'over-borrowed' in future and protect them from the likelihood of losing their home even if interest rates do rise."

Ã¢â¬Â¢ Credits or Article Source: Property24.co.za
Ã¢â¬Â¢ Posted On: 06 July 2007

----------


## Dave A

I am continually impressed by property professionals' ability to find the upside in adversity. (And no - I'm not being sarcastic, I genuinely mean it).

----------


## Eugene

Seems like the old saying:

For every problem is life... there is a solution, which is simple, straight, neat, to the point and wrong...

----------

