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New Home Loan Lending Policy for South Africa

South African banks have made some major changes to their home loan lending policies in recent years. These changes were basically enforced on the banks through changed legislation such as the National Credit Act as well as the global credit crisis that has led to a world-wide recession, the worst in 80 years.

The impact of the New Credit Act

The new credit act came into effect on 1st of June 2007. It had a major impact on home loan lending in South Africa. Previously the banks would look at the home loan repayment as a percentage of your income not exceeding 30%. Since the implementation of the act the banks have to look at your overall financial status – all your debt, monthly expenses, credit record, assets and liabilities are taken into account when the bank makes its decision to grant a home loan or not. Basically it boils down to this - you have to demonstrate your ability to repay your debt and if you can’t afford it you can’t have it.

108% Loans

The credit act has been heavily criticized but it’s not the evil it’s made out to be. Many people were given 100% and even 108% loan to value bonds to enable new buyers to enter the property market during 2005 – 2008. Then the credit crunch hit the world, spilling over to South Africa and property prices declined. The residential property market has reached a 12 year low. Standard Bank released it median house price index on the 20th of January 2009 which shows a 3.1% decrease in December in the figures compared to the previous year. It brought the average annual decline in 2008 to 0,3%.

Many of those home-owners who were granted 108% home loans could not afford the increase in their home loan repayments with the rise in interest rates, and their properties are now worth less than when they bought them two years ago. When the banks re-possess these properties they are not able to recoup the outstanding amounts on the home loans, resulting in bad debt increases.

The new Home Loan Policy

In mid 2008 the banks had to re-think their lending policies and the 108% loan offers were withdrawn from the market. When we refer to a percentage here we talk about the home loan amount as a percentage of the bank’s valuation of the property. The home loan policies of the banks still differ from bank to bank but none of them currently offer 108% home loans. Some still offer 100% loans, while some have introduced a sliding scale – the higher the amount you want to borrow the lower percentage loan you will qualify for. The result is that people must be able to provide a bigger deposit when buying property. The maximum loan that banks are granting on vacant land at present is 75%.

The other qualifying criteria

Remember, these limits are only one of the factors taken into account. The credit requirements in terms of affordability, clear credit record and your overall financial position are also taken into account. It does not matter how much value there may be in the property you want to buy, if you can’t afford the repayments the bank will not grant a loan. Banks are not in the property business of buying and selling homes!

Should one stay in the property market?

After having painted you such a picture of doom and gloom, what a question! The answer will depend on your own financial position. First of all, things are already looking better, the interest rates have now come down by 1.5% since December and all indications are that this trend will continue in 2009.

If you can weather the storm, hold on to your property by all means. It may not look like an investment to you now, but property should be a long term investment. Ask any home owner who has an existing property of at least ten years old, it is still worth much more today than what they paid for it. When the market turns you will start to see the value increase in your property.

Should one invest in the property market right now?

If you are in the fortunate position to have money to invest, most economist will tell you that it’s a great time to buy property as you can shop around for bargains now. But you need to have a deposit in most cases, taking many people out of the market, while investors in the buy-to-rent market are expanding their portfolios.

Keep it simple

2009 should be named the year of “keep it simple.” Or the year of survival of the fittest. Save where you can, draw up a monthly budget and stick to it, get rid of short-term debt, hang on to your house, or buy one if you can and stay optimistic. Look forward to a brighter future.

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