Whenever the decline in property sales and the slow-down in property price growth come under discussion, the National Credit Act invariably assumes a position alongside the escalating interest rates, the soaring oil price and the unexpectedly high inflationary figures, as one of the culprits.
Although there can be no doubt that the NCA has had a detrimental effect on the property market, the amount of pressure it exerts, is open to debate – especially in view of the fact that the inflation rate and the value of the Rand have been central to our upwardly mobile repo rate. As consumers, there is precious little we can do to change the Act, and even less about the influence it has on the market.
So, perhaps expending our efforts on understanding the Act and how it influences our credit applications instead, would help us engage with this controversial ‘system’ a little better.
The Aim of the NCA The purpose of the NCA is to regulate credit and aims, amongst others, at:
Protecting consumers from becoming over-indebted;
Preventing dubious lending practices;
Making sure that credit is extended by lenders in a transparent and responsible manner; and Ensuring that the rights of consumers are safeguarded.
How your home loan application is affected
As was always the case, the lender will still evaluate your personal information, your credit profile and the property you wish to acquire, and they will still use their in-house scoring method in conjunction with those of the credit bureaus to establish what the risks are in extending credit to you. In this respect, nothing has changed.
The real changes that do affect your application are:
The credit granting process; and
The credit granting process
The banks are now forced by law to be responsible when extending credit; to refrain from predatory, exploitative and opportunistic practices; and to implement transparent credit processes.
This means that, when they evaluate your application for a home loan, the lender will be obliged to:
Thoroughly assess your credit history.
This means – amongst others – that they have to make a proper evaluation of your past and present spending and payment habits; that they have to know where you have accounts, how much you currently owe to other lenders and what your repayment obligations are in respect of these debts etc. The raison d’etre is to gain a clear picture of what your current level of indebtedness is.
You will appreciate that evaluating whether you have ‘room’ for more credit is impossible without this type of information. If you have multiple open accounts, which carry balances, and if your repayments on these tally up to an amount that could adversely affect your home loan application, you may want to finish paying some of these before making a submission to the bank.
Determine whether you can afford the repayment.
Affordability used to be purely based on gross household income, with 30% of this income the generally accepted rule of thumb. Now, under the NCA, the lenders are compelled to look at your disposable income instead. Disposable income is the amount of money left after all your expenses have been paid.
This will only affect your application negatively if you are trying to secure a mortgage that will exceed your disposable income. Once again, the affordability requirement is aimed at protecting you from becoming over-indebted.
Supply you with a quotation and a pre-agreement
The lender is obliged to provide you with a written, no-obligation credit quotation, which is valid for 5 days, and a pre-agreement that includes principal debt, interest rates and the other costs associated with the loan. This affords you the opportunity to shop around for alternative quotes and, at the same time, serves as a cool-down period.
Ensure that you understand the terms, the content and the implications of the credit agreement.
All documents pertaining to credit have to be in a language that you can read and understand. These documents must use laymen’s terms and must refrain, where possible, from unnecessarily using technical-, industry- and legal jargon.
The NCA affords you, amongst others, the following rights:
The right to apply for credit. If the credit is declined, it has to be on reasonable commercial grounds. You are entitled, by law to know why you were not approved. If it was as a result of your credit rating, the lender has to furnish you with the full details of the particular credit bureau.
The right to receive your credit report from the credit bureaus at no charge once per year; the right to challenge these records; and the right to compensation, should the records not be corrected.
The right against unfair discrimination by lenders.
The right to confidentiality. The lenders are obliged to hold all information about you confidential and are not allowed to disclose anything without your consent.
One of the latent, and perhaps unintended, effects of the NCA is that the approval process could take somewhat longer than before. Working with a mortgage originator is likely to expedite the process.
If you meet all of the traditional lending criteria, behaved as a responsible debtor in the past and remain within the boundaries of affordability in respect of the amount you apply for, the impact of the NCA on your application should be the one thing you need not spend any valuable time on worrying about.