Those serious about buying their first home need to get their ducks in a row long before they start to scour property sites. The National Credit Act, which was introduced in 2007, has forced credit providers to rethink their lending policies. It has also essentially stopped the public from incurring too much debt. The Act governs banks, micro lenders and retailers, such as clothing and furniture stores which offer credit, to name a few.
According to an online brochure aimed at educating the public, the NCA affords everyone, whether an individual, a group of people or a company, the right to apply for credit from any credit provider. This right, however, does not prevent the credit provider from refusing to grant the credit, providing that the reason for the refusal is based on business grounds in line with their normal credit risk analysis evaluation processes. In other words, extensive credit checks will be carried out before a loan is granted and even when it is approved, it may well carry conditions which, in the case of a home loan, could mean a deposit.
Today, roughly 20 percent of all bond applicants in South Africa require 100 percent bonds but the rejection rate on this type of application is always a great deal higher than the average, says Mike van Alphen, National Manager of the Rawson Property Group's bond origination division, Rawson Finance.
Some 85 percent of those applying for 100 percent bonds, he adds, tend to buy in the R500,000 to R750,000 price bracket. Those hoping to buy above R750,000 are often upgrading and can put down 10 or 15 percent deposits as a result of the sale of their current home.
"The banks are sometimes accused of being too harsh in their assessments of 100 percent bond applicants. However, in my experience, this is not so - they are committed to helping this sector but they have to work to the rules and standards set by the National Credit Act and there is no getting away from this."
Despite on-going publicity in the media on the subject, the vast majority of bond applicants do not check their credit records before applying for a bond, nor do they make any attempt to save for a deposit.
"In these circumstances a good originator can help: every South African resident is allowed one free credit check per annum and if further checks are needed, the originator can arrange these. Furthermore, an experienced originator can advise the applicant on how to manage his or her expenses so as to build up a nest egg for a deposit. This may be a long term process and saving may take a year or two, but many good bond originators have set applicants on the right path in this respect."
The other common mistake is that buyers often set their home buying sights too high and attempt to secure bonds for sums in excess of what their incomes allow. The easiest way to overcome this problem is by approaching a bank or bond originator to ascertain what sort of sum the banks will be willing to lend before the house hunt begins.
Champagne tastes on a beer budget have no place in South Africa's banking circles and no bank, regardless of how desperate they may appear to be to lend money, is going to run the risk of over indebting consumers.
"We all recognise that an increase in 100 percent bond approvals is exactly what is needed to stimulate the housing sector and allay social discontent. However, this must not be done by ignoring the provisions of the National Credit Act, which, applied at exactly the right time, has succeeded in limiting reckless spending. It has also, to a large extent, protected potential home buyers from accumulating a large monthly debt commitment that they simply cannot afford," concludes Van Alphen.