Credit Act

Buyers and sellers should be aware that as a result of the new National Credit Act introduced this month, home loan transactions are going to be more complicated, detailed and “financially revealing” than ever before, according to Johan Killian of Lew Geffen Sotheby's International Realty, West Rand.

Guidelines determining the amount borrowed will also be much stricter.

“Pre-approved home loans will no longer be allowed,” says Killian. “And, through these new processes, SARS will be more able than ever before to detect tax evaders through their property transactions. Buyers will have to provide extensive details about their income and estate agents will be instrumental in the new system.

“It is not unlike a decade or three ago when applicants had to complete a four-page application form with detailed explanation of their income and expenditure. This will, however, take some getting used to since buyers and agents have been spoilt by fast-track electronic processing of applications with very little detail required in the recent past.”

Killian says apart from a more complex and less speedy buying and selling process, the actual loan amount that a specific buyer can raise will now be determined on a totally different basis.

“In the past, the criterion was that a buyer could apply for a home loan worth 30% of his or her joint monthly family income; therefore, if total family income was R40 000, the borrower was deemed to be able to afford a repayment of R12 000 per month and the loan was determined by that figure.

“In future, the repayment affordability will no longer be a flat 30%, but will be based on the individual’s or family’s net disposable income, after repayment of all other debts. Therefore, from the client’s R40 000 income, items like school fees, maintenance payments, car installments, household and living expenses, shop accounts, credit card debt, security services and medical aids, will all be deducted and only the net disposable income will be taken into account when calculating affordability levels. “

Killian says the net impact will be that people with high debt burdens will have to scale down on their housing aspirations, while those with very little debt on cars, credit cards and moderate household expenditure, for example, could qualify for larger amounts.

“Investors in the buy-to-let market will also face tighter controls as stricter norms are implemented in respect of future income on leases that are not yet in place. Inter-bank database sharing will also prevent borrowers from ‘leveraging’ their borrowing capacity by using multiple banks to finance their transactions or run an array of credit cards,” he says.

“Despite the inevitable teething problems that should be expected, implementation of the Act will probably enhance the economic health of the average South African family, so that we live more within our means. It should also assure sellers of properties that once their buyer has been passed through the stringent new qualification process, their transaction would be based on a solid footing.”
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