NCA: The Bane of Property Investment
The National Credit Act (NCA), since its inception, has been controversial. Quite nobly, the NCA was intended to safeguard consumers from exploitative lending practices and to prevent over indebtedness. But, on the flip side, the NCA’s knock-on effect was to serve as a dampener on economic activity in a variety of industries.
Investment Property is one of these.
Property as an Investment
Owning more than property could be a sound medium to long term investment:
1.Regular income, in the form of rentals, can be generated from the property. The income generated can be employed to subsidise the bond on the property and to cover maintenance.
2.Income Tax deductions are possible. If SARS is prepared to view the property as an investment property, certain deductions are allowed.
3.Property appreciates over time. Although the property market is cyclical, property appreciation usually outstrips inflation.
4.Property creates wealth. It can be sold to realise cash, which could be used to either reinvest or for retirement purposes.
5·.The purchase of the property can be funded via a bond you secure from the bank, making it one of the very few investments where no large upfront capital outlay is required.
Property investment and the NCA
Historically, the banks were quite happy to grant home loans for additional properties provided that the property valuation was realistic, that the buyer was in good standing from a credit perspective and that the repayments were within the means of the buyer. The banks sometimes extended home loans – particularly for second and third properties to be purchased for Buy to Let purposes – with a measure of good faith. The risks associated with extending a home loan were relatively low because the property to be mortgaged served as collateral.
The NCA changed this approach.
In determining whether a consumer will be able to repay a loan on an investment property, Section 78 (3) (c) of the National Credit Act states that “if the consumer has or had a commercial purpose for applying for or entering into a particular credit agreement, the reasonably estimated future revenue flow from that business purpose” can be taken into consideration.
This means that a reasonable estimate of future rentals can be taken into consideration by the bank as part of the buyer’s income.
However, Section 81 (2) (b) of the NCA explicitly states that, in order to avoid being deemed a reckless: “A credit provider must not enter into a credit agreement without first taking … reasonable steps to assess -whether there is a reasonable basis to conclude that any commercial purpose may prove to be successful, if the consumer has such a purpose for applying for that credit agreement.”
This means that it is up to the bank to make the call whether the property will be occupied, and whether if it will be occupied to the extent that one could call it a successful Buy to Let venture.
If the rentals make the difference between whether the buyer is eligible for the loan or not, and the bank includes the projected rental income in their decision to extend the loan, they face some very real risks.
Should the buyer end up defaulting at some point in time, he or she could sue the bank for reckless credit provision on the basis that the bank included the prospective rental income without properly assessing the viability of the rental property. Regardless of whether this allegation is true or false, the onus will then be placed on the bank to prove that they were reasonable in their assessment of the rental viability, knowing that the word ‘reasonable’ is rather vague – even in legal terms – and open to interpretation.
So, who can blame the banks for ignoring projected rental income most of the time nowadays?
Fortunately, there are ways and means to circumvent the NCA If you want to purchase additional properties. It may be worth your while to solicit professional advice on establishing a Close Corporation, Trust or Company instead. These fall outside the ambit of the National Credit Act, and may offer a less onerous alternative to investing in your personal capacity.
Although the bank will still scrutinise the ability of the vehicle of your choice to honour the mortgage repayments, they will not be required to satisfy the (perhaps) too generalised, commercially out of touch and somewhat draconian rules of the NCA.