Sep 17 2007
What is the NCA?
Posted in Property Finance
The National Credit Act came into effect on the 1st of June 2007 with all Credit Providers being required to comply with the Act in order to continue lending. Its main objectives are to:
– alleviate the over-indebtedness of consumers; and
– regulate the credit industry
How does it affect my home loan application?
The Act requires that Credit Providers conduct a full assessment of the consumers’ credit worthiness and the banks have applied stricter credit policies to fulfill their obligations and avoid the harsh penalties imposed under the Act. More specifically this translates into the following:
- The banks require a full income / expenditure which they are obliged to verify using the Credit Bureau.
- Using this income / expenditure, the banks determine your disposable income (i.e. the amount of money you have left over at the end of every month which is not allocated to servicing any debt or monthly expense). The banks now use this figure to determine the size bond you qualify for as apposed the old system where the banks allowed you to spend 30% of your gross income on a bond repayment.
- The banks require a full assets / liabilities which they are obliged to verify using the deeds office records (This means clients can no longer apply to one bank for a home loan and withhold information regarding an existing bond/s at another bank/s).
- Clients buying into developments where registration is 12 – 18 months (and longer) after bond approval, will be re-assessed by the banks to confirm that their financial situation has not changed significantly, rendering them no longer eligible for the bond. This obviously has significant ramifications for the development industry.
So, is the NCA a good or a bad thing?
While the NCA has certainly had an effect on both the property market in South Africa and the consumer directly, BrayCorp feels that this effect is actually a positive one, including the following benefits:
- Helping to prevent over-indebtedness – With the banks attempting to ensure that no-one becomes over-indebted, it is expected that fewer people will get into financial trouble, losing their properties. Where clients may have previously over-extended themselves and learnt a hard lesson, they may be spared the heartache by being refused finance which they cannot afford.
- Helping to keep the interest rate down – While there are many factors influencing the Reserve Bank’s Repo Rate (and therefore the banks’ prime lending rate), having less overall debt is certainly a contributing factor.
- Stabilizing property prices – With fewer clients being able to get bonds (and therefore fewer buyers) sellers are forced to be more negotiable on their prices, resulting in more realistic sale prices. This is helpful for first-time buyers who have until recently been priced further and further out of the property market. This is also beneficial for investors who may be more likely to pick up a bargain as a seller may have few or no buyers at their show house and / or can no longer afford his/her bond as a result of the interest rate increases.
- Possible increase in rental returns – With fewer people being able to get bonds and / or people qualifying for smaller bonds, more buyers may turn to the rental market since they are unable to buy. This increase in demand may result in an increase in rentals, benefiting investors in the buy-to-let market.
Submitted by Jessica Linde of BrayCorp
8 Replies to “What is the NCA?”
Is it correct that Trusts, Close Corporations, and Companies are excluded from the provisions of the National Credit Act? Are there any other exclusions?
It is important to remember that while Trusts, Close Corporations and Companies are excluded from the provisions of the NCA, bond applications made by these entities are still required to be submitted in the same manner as an individual.
That is to say, that all trustees / members / shareholders are required to provide a full income / expenditure in the same manner as an individual applying post-NCA, however the protection of the consumer at which the NCA is aimed, does not apply to these entities.
In other words, should a CC, Trust or Company decide that the bank has ‘recklessly lent’ to them, they are not protected under the NCA.
Another interesting point to note, which I recently learned from Mike Peters at FNB, is that Trusts with 3 or more trustees are not excluded from the NCA.
What are the negative effects of the National Credit Act in terms of reduction of morgages granted, etc.?
It is important to remember that the NCA has left the banks’ credit policies relatively unchanged. What the NCA has done, is change the way the banks qualify clients, that is, determine what size bond a client is considered able to service. The reduction in bonds granted due to the NCA is as a result of its effect on the qualification process. This effect is 2-fold:
1. The end of ‘spreading debt across the banks’
Previously, if a client qualified for a R1m bond and he / she had a R1m bond at, for example, FNB; the client would apply for his next R1m bond at, for example, ABSA. As a result, ABSA would not necessarily be aware of the client’s existing bond at FNB and would grant the new R1m bond based on the client’s income.
This ‘loophole’ has since been closed under the NCA, which ensures that the banks perform a reasonable investigation into the client’s financial situation. This includes a Deeds Office Search (which would pick up all the client’s existing bonds) and a Credit Bureau Enquiry (which gives the bank an indication of both your average monthly debt repayments as well as your monthly payment ‘track record’). The Credit Bureau Enquiry brings us to the 2nd effect the NCA has on the banks’ qualification process:
2. The end of qualification of a client based only on his / her income
Previously, 2 clients who earned the same income qualified for the same size bond. Under the NCA, where the banks now look at both income and monthly expenditure, these 2 clients may now qualify for 2 different size bonds. Client A may have an existing bond, vehicle repayments and a personal loan, whereas, Client B may have no existing bonds or personal loans and his / her vehicle is paid off. As a result Client B will have a higher disposable income allowing him / her to qualify for a larger bond than Client A.
As a result of these 2 effects, many clients who were previously being granted bonds, may now be declined, resulting in a decrease in the number of bonds being granted. What we have also seen, however, is that clients who were previously declined (due to the old rules of qualification) are now being assessed taking their entire financial situation into account, resulting in the banks now granting bonds to these clients. These are generally high income clients with higher disposable income than the average salaried person.
This effect may, however, be counterbalanced by the effect of the NCA on the average first time buyer. These clients tend to be young professionals just starting out, generally salaried individuals, who do not have significant disposable income to allow them to service a bond required to buy an entry level property in South Africa.
So, while the NCA has certainly affected the number of clients able to qualify for bonds, BrayCorp believes that the NCA will prevent clients from becoming ‘over-indebted’ and hopefull the reduction in debt will help with our rising interest rates.
Many thanks for your detailed and informative reply.
anybody here know of a good site to find more info on 1st Financial Bank? I’ve got this site bookmarked and im gonna keep checking it out, but i still would like to find a site that covers 1st Financial Bank a little more thoroughly..thanks
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