The National Credit Act has completely changed the way that banks do business. In a nutshell, if they are caught lending irresponsibly, they have to face the music and are liable for a hefty fine. This, coupled with the banks’ reaction to the continuing economic situation, has made the process of applying for a loan of any sort a longer and more tedious process. At the height of the boom, banks seemingly gave bond applications a cursory glance and handed out money like there was no tomorrow. Those days are long gone and those who believe that they more than qualify for a loan may be in for a shock once they have found the home of their dreams.
"At this time of the year there is always an influx of upcountry people into the Western Cape, and a small number of these (perhaps 2 percent) find themselves wanting to buy property here each year and start making enquiries to that end," says Mike van Alphen, national manager of bond originators, Rawson Finance.
According to Van Alphen, this is part of a national trend which FNB's Property Leader Sales Strategist, Clinton Martle, recently identified in a talk to Rawson Finance staff. Martle said that the younger generation at the coast tends to move to Gauteng, possibly to improve their income, whilst the older generation tends to come south.
"Many potential property buyers, but especially those older people who have not recently been involved in property dealing," says van Alphen, "are dismayed to find that after identifying a property or an area they like, they do not qualify for a bond - even though in South African terms they are high earners, with salaries of anything from R25 000 to R100 000 per month.
"The sad truth which they then have to face," adds Van Alphen, "is that under the banks' new credit criteria, their earnings/expenditure ratio makes them a bad risk in today’s stringent, over-exposed economic conditions. The fact that they may have large assets does not help them as the banks will focus on their income stream in relation to the regular/typical monthly payments and these will form the basis for their decision."
He says that it will not help to argue, as many do, that their extra income from non-core sources, although possibly intermittent, is rock solidly reliable. As the banks see it, no investment is completely safe and they will want assurance that there is a comfortable buffer between monthly income and expenditure and that the income is assured. In particular, they are likely to take a negative view of too many ‘high flyer’ payments, for example luxury cars, expensive holidays, entertaining and too big a range of investments.
In a recent case it was noted that a Gauteng resident with a substantial income and four properties, three in holiday areas, had to sell one of these before the bank would agree to his bond. He was also told to limit his fixed monthly personal expenditure to a specified amount.
It has become increasingly clear that given the current economic climate, no one can take anything for granted, and no one can assume that they will automatically qualify for a home loan. Under these circumstances it is recommended that, in order to avoid disappointment, buyers talk to their bank or bond originator before going on the hunt for property.