Author : Homeloans SA

The NCA and How It Affects the Home Loan Market

The culprit is…

The decline in the property market has been blamed on many factors such as the world-wide recession, the high interest rates, inflation and also on the National Credit Act (NCA.) The NCA came into effect in June 2007 and no-one can deny that it did have a negative effect on the property market, but it should not be seen in isolation. All the factors mentioned above have worked together to put severe pressure on many households, not just low-income families.

The act replaced the Usury and Credit Agreement Acts that were in place before. No doubt it is now more difficult to get a home loan approved than in the past. Players in the bond originator market have reported a fall of up to 70% in terms of approved applications. First time home buyers are particularly hard hit when banks removed their special First Time Buyer products late in 2008, but this was due to the world-wide credit crises. Some actually say that the NCA saved South Africa from going the same route as America with its property market collapse.

Arm yourself with knowledge

The best advice we can give you is to gain a better understanding of how the NCA affects anyone who applies for a home loan. The NCA is really there to protect the consumer’s rights and prevent them from over-indebtedness. Most South Africans cannot survive without credit – credit is not a bad thing in itself; the problem lies in the huge number of people getting into trouble because they cannot afford to repay the amount of debt they have accumulated. The NCA is the government’s way to help South Africans get a hold on their overall indebtedness and create a fair, clear, controlled, non-discriminatory, competent, accessible and responsible credit marketplace.

Some of the aims of the NCA are as follows:

1. To regulate the responsible granting of credit. A big change is that credit lenders have to look at the total debt of a home loan applicant. In the past the qualifying criteria was based on 30% of monthly income. The lenders are now looking at what you have left (or available) after all your monthly expenses have been deducted from your income; it is called your net surplus income. All your debt must be declared, including credit cards, store accounts, car loans and any other loans. If it is proven that a bank granted a home loan recklessly under the new act, they can be held liable for the full amount and may receive a huge fine to boot. The banks therefore have to protect themselves by scrutinizing the application very carefully before approval.

2. Regulating the costs of credit. The client is entitled to a quote before finalizing a credit application. A quote must include all the costs associated with the application, including the total cost of credit.

3. The consumer must be informed – this is good news: the lender must clearly state what interest rate and other charges or fees will be payable by the borrower. The borrower must understand all the terms, risks and obligations of taking out a home loan.

4. Credit Bureaus must comply with a number of provisions and ensure that their information is accurate, can be disputed, corrected or removed where appropriate.

5. The onus is now on the credit provider to prove compliance where in the past the consumer had to prove non-compliance.

6. You can see a debt counselor if you cannot keep your payments up to date.

7. Home Owners Insurance is still compulsory but clients can choose their own insurer.

It is taking longer

One point that cannot be argued is that home loan applications are taking longer to approve, although it is not as bad as some prophets of doom predicted. Banks had to implement new systems, more information is required and the completion of forms and getting all the required information has slowed down the process.

Home loans from Mortgage Originators must be completed in full and the banks re-confirm information with the client. There are prescribed warranties and declarations that must be signed by the applicant before the bank can process the application. Working through a reputable mortgage originator who can help you with your home loan application can help speed up the process.

Good news for serious sellers

For sellers the NCA brings the benefit that once the buyer has passed the strict new home loan application process, there is an excellent chance that the deal will be finalized without any major challenges. Pre-approved home loans are no longer allowed. Having too many credit commitments will count against you now and it would be in your best interest to reduce the amount and number of credit accounts you operate before applying for a home loan.

The way forward

With all the easy credit many South Africans have become used to living above their means. This is no longer the case and some of us will are feeling the pain. A year and a half after the introduction of the act, South Africans should look at the positives and be thankful that the act has our best interest at heart. Eventually living a lifestyle that you can afford will provide you with peace of mind, which is a wonderful feeling.