Your NCA questions answered
Following our recent Intranet poll, and as a different take on the much-debated National Credit Act (NCA), we answer some of the questions raised at a recent investor’s seminar held in the Nedbank executive dining room.
Our recent Intranet poll regarding the impact of the NCA yielded some interesting results. We asked the BondExcel Community, “Do you think the NCA will affect the homeloan volumes negatively?”
The majority of the BondExcel Community felt that the NCA will not negatively impact volumes, while 32% of those who responded to the poll felt that it would.
Don’t panic, but credit will never be the same again. However, how we approach these changes will be the factor that makes the biggest difference. If we are negative about the impact of the NCA, it will become a hassle and make our lives miserable. If we are positive, we will get what we deserve.
here are some answers to a few frequently asked questions.
How will the NCA impact investors and speculators?
The NCA attempts to prevent reckless lending. In that sense, it is geared towards the lower income sector of the market. It will, however, also impact the more affluent sectors such as investors and speculators, because it will curtail the ability to gear beyond the point of affordability, as determined in the mind of the credit manager.
My expectation is that this impact could be quite extreme in the beginning but will temper in the medium term. Give it about six months, and credit lending will revert to what we today consider normal.
Will it be an obstacle to buying more properties?
As stated above, you may experience medium term obstacles with regard to your ability to gear, but over time the situation will improve. My advice is to use this time to deplete your debt as far as possible.
Will it hamper me in my quest to become financially free?
Financial freedom should be measured not by gross asset worth, but by net asset worth. Whilst financial freedom does not mean an absence of debt, it does mean the presence of your income target. Highly geared and simply paying off debt, no matter how many flats you may own, is not financial freedom. As stated before, use this time to settle some debt.
What are the main elements that will directly impact me as an investor or speculator?
The only real issue in a market as mature and trustworthy as the homeloan market is the issue of affordability vs. gearing. Remember that it could be time for us investors to seriously motivate our applications. What I mean by this is that previously we have allowed the banks to only consider a portion of rental income as income in their repayment to income (RTI) decision. We may now have to confirm vacancy rates and show 12 month’s of signed agreements to enable the bank to be more realistic regarding sustainability of income.
How will the home loan approval process change?
Apart from terminology (for example, formal grants will now be called quotations), the homeloan process is only really affected by the requirement of the NCA that banks phone clients to explain the quotation to them. My suggestion is that you try to delay this process until one quotation has been ‘bank selected’ on the system.
How will banks assess my affordability after 1 June?
After 1 June, the principle of 30% of joint gross monthly income continues to apply when the banks assess affordability. However, the banks will now insist on a detailed income and expenses statement and therefore bring personal disposable income into the equation. The banks have not developed a generic approach to this latter number, but my sense would be that, as a guideline, your payment should not exceed about 50% of personal disposable income. We will have to wait for the banks to structure their process through their experience of the Act.
What fees will change and to what extent?
The only fees and charges that may be levied are an initiation fee (R1 000 per agreement, plus 10% of amount in excess of R10 000, never to exceed R5 000 or 15% of principle debt); a service fee of R50 per month; interest; credit insurance; default administration charges; and collection costs.
What is interesting is that the banks have already begun to issue new pricing with regard to the R5.70 admin fee charged monthly. Refer to the Nedbank fee structure on the Intranet. Both Standard Bank and Nedbank have implemented different fees for clients who have their homeowners insurance included in their bond, and for those who have their own insurance in place.
Interestingly too, the service fee of R50 per month excludes VAT, so the actual amount the may be charged is R57 a small individual figure that will have massive implications on the banks’ side. The maximum interest rates will affect lenders and borrowers significantly. Investors will be hard pressed to raise facilities but ultimately, this will strengthen the property economy because healthy lending is good lending. Developers, too, will be affected as speculators dry up.
How will the National Credit Register work and how will it affect me?
It will work with difficulty! I am hearing from various parties that this process and the technology behind it is under discussion and my sense is that it will only come into effect two years from now for new homeloans, and it will be five years before a complete register of lending including all individual transactions will be available.
Will the Act shrink the size of the buy-to-let market?
Not in the long term but the Act will have a medium term impact. Frankly, the rise in the interest rates, added to the rise in house prices, has already begun to shrink the buy-to-let market as a percentage of developers’ sales. The question to ask is: “Is rented residential property a valid investment asset class?” The answer, in my opinion, is “Absolutely!”