Home buyers may stumble at debt hurdle

By Neesa Moodley

The National Credit Act (NCA) has changed the way banks assess your home loan application, and you now have to do more to prove that you have sufficient after-tax income to meet your loan repayments.

And, because of the NCA's strict lending requirements, soaring house prices and steeper interest rates, you may have to take out a mortgage bond over 30 years instead of the traditional 20-year period to buy a home (see below "You'll pay more for a longer-term mortgage").

When you applied for a home loan before the NCA took full effect on June 1, the bank simply looked at your income when processing your loan application. The rule of thumb that the major banks used to determine the size of your loan was that your repayments should not exceed 30 percent of your gross income. This rule of thumb was not dictated by legislation.

Now, in terms of the NCA, you will be required to provide the bank with detailed information about your monthly income and expenditure, and full details of your debt obligations. The bank will check this information against that held by the credit bureaus, and also assess your credit rating if you have other accounts at the bank.

Detailed quotation
The bank will then provide you with a quotation, which must clearly state the total cost of the loan, the loan amount, the type and amount of interest that will be charged, the loan repayment period, and details of any fees and charges, such as initiation fees, administration charges and licensing fees.

The quote is valid for five working days, during which time you can source other quotes from competing financial institutions.

The NCA stipulates that credit providers can only lend you as much money as you can comfortably afford to repay. This means that credit facilities, including home loans, may not be extended based on your gross or net income alone but must also take into account your ability to repay the debt.

The implication is that if you have only a few credit agreements to your name, you could qualify for a large bond, because you have more discretionary income, Gavin Opperman, the managing executive of Absa's home loans division, says.

On the other hand, if you have a high gross income but numerous credit agreements - such as vehicle finance and credit cards - as well as high monthly deductions - for items such as private school education, insurance, home security, entertainment and investments - you could end up qualifying for a smaller bond amount than you would have before the NCA was implemented.

The NCA has also introduced maximum interest rates and initiation fees on home loans.

The maximum interest rate you can be charged on a mortgage bond is the repo rate (9.5 percent) multiplied by 2.2, plus five percent. This equals 25.9 percent a year at current interest rates.

The NCA states that the maximum initiation fee for mortgage bonds is R1 000 an agreement plus 10 percent of the amount of the loan in excess of R10 000. The fee is capped at R5 000 excluding VAT (R5 700 including VAT).

So, if you take out a home loan of R850 000, you could pay an initiation fee of as much as R5 700. Before the NCA took effect on June 1, you would have paid a fee of about R3 500, according to bond originator Mortgage SA. The charge of R3 500 would have included a property valuation fee, which the banks are no longer permitted to charge.

If you had taken out a loan of R850 000 with Absa before the NCA was implemented, you would have paid R1 648 in valuation fees and a further R1 140 in initiation fees - a total of R2 788.

In addition to the initiation fee, the NCA states that a monthly service fee of no more than R50 can be charged on your home loan.

Previously, banks would have charged you an initiation fee each time you asked for a further advance on your home loan. But now, in terms of the NCA, banks may charge you an initiation fee for the first loan amount only.

You should shop around for the lowest initiation and service fees because the banks add them to the home loan amount, which affects your total monthly repayments.

You'll pay more for a longer-term mortgage
Higher property prices and a two-percentage point increase in interest rates over the past year have led to more home buyers taking out mortgage bonds over 30 years rather than the standard 20-year period.

House prices in the middle segment of the market grew by 15.5 percent year-on-year in May, according to the latest Absa house price index. A house with a size of between 80 and 400 square metres has an average selling price of about R921 300, the Absa index found.

Mary-Jane Lefevre, the call centre manager at MortgageSA, says 30-year bonds have become more popular, mostly for purchases between R600 000 and R850 000.

But if you extend your mortgage bond repayment period to 30 years, you will end up coughing up far more in interest over the term of the bond - making your property purchase more costly than if you paid it off over the standard 20-year period.

Leon Barnard, the director of Standard Bank home loans division, says the bank has witnessed a steady increase in the percentage of 30-year bonds registered in the past year.

"In the past six months, there has been a decline in the percentage of 20-year bonds registered, as a result of longer-term bonds becoming more popular. However, it's important to note that you have the option to specify a 25-year loan if this will better suit you needs," Barnard says.

The application process for a 30-year mortgage bond is the same as that for a traditional 20-year bond. However, most banks would prefer to schedule your loan so that it is repaid by the time you are 75 years old.

Lefevre says many buyers are so focused on the lower monthly repayments on longer-term bonds that they often overlook the implications of the extra interest payments.

For example, if you take out a loan of R700 000 at an interest rate of 13 percent, your monthly repayments will be R458 less on a 30-year mortgage bond than on a 20-year bond. But the extra 10 years will add R819 240 to the total amount you will have to repay. Over a 30-year term you will repay a total of R2 787 480, compared with the R1 968 240 you will repay on a 20-year mortgage bond for the same amount (see table).

"If an extended term on a home loan is the only way that you can get into the property market, then it is worth considering. But we would advise buyers to stress test their budgets and talk to a reputable mortgage originator to ensure that they have researched all the options available to them," Lefevre says.

"We would advise that you first get a mortgage originator or your bank to negotiate the best terms possible for you on a 20-year bond. Then have them clearly explain all the costs and implications of a longer-term or 30-year bond," she says.

If you still require the longer-term loan, a bank or mortgage originator will advise you on how you can best manage the repayments. The loan can be restructured at a later stage when you are able to afford higher repayments and want to reduce the term of your bond.

(Persfin, 16 June 2007)