Credit Act Curbs Buy-to-Let Market

The National Credit Act , which came into effect on June 1 this year, will "severely restrain" residential buy-to-let investors and developers by ensuring these players receive credit only if they can prove they can afford it, attorney John Gilchrist says.

Gilchrist, a partner in law firm Gishen Gilchrist , says the new legislation will to a certain extent "freeze" the residential property market as fewer buyers will qualify for bonds.

Gilchrist, who was delivering a presentation at the annual Rode Conference on Property in Johannesburg, says skyrocketing residential property prices have trimmed back the number of buyers in the marketplace and the act will merely reinforce this.

"About 20%-30% of the residential property buying market has disappeared since 2004. This is due to the 200% increase in property prices over a five-year period. There is virtually nothing viable under R400000 today."

Gilchrist says that about seven years ago, 20%-30% of the residential property market could afford property under R400000. "That market has virtually disappeared."

The average price of a home then was R250000. The average now is R950000.

In this context, for most people, the act will "just complicate the qualifying process".

"The (act) is just going to weed out the people who can't afford credit and it will severely restrain individual investors and property developers," says Gilchrist.

The legislation will reduce the number of people who will be able to invest in the buy-to-let residential market , and limit the number of properties they can acquire, he says.

"Previously, the way it worked was that banks would lend you up to 25%-30% of gross income. This meant they calculated 25%-30% of the gross income as a monthly bond instalment.

"Now, banks will be focusing on disposable income and looking at all outstanding debts."

The new law is "good" and will have a "pruning effect", Gilchrist says. "It means money only goes to people who can afford to repay it, especially in difficult circumstances."

He says the qualification of buy-to-let investors for bonds before the act came into operation involved a bank simply looking at the monthly rentals achieved in the investment property in question and comparing them with the monthly bond repayments, rates, taxes and other levies. "They would have previously allowed 100% of the rental on average going towards qualification for the loan. Now this has changed and the banks won't allow it.

"One bank has told me it will now only allow 40% of the rental on average going towards qualification for the loan."

The act requires banks to check the overall credit exposure of borrowers before approving any new loan. It is aimed at protecting consumers from reckless lending.

Banks will be penalised if they have been found to have lent money to someone who cannot afford it.

In extreme cases of reckless lending, a bank could find that the debt owed to the bank is written off completely.

Gilchrist believes banks will "err on the side of caution" when it comes to implementation of the legislation .

FNB Homeloans CEO Jan Kleynhans says that when a bond application reaches the bank, it looks at disposable income to make sure the client can afford the loan .

"In terms of the buy-to-let market we will look at 100% of rental income provided that the income the customer declares from his existing buy-to-let property is verifiable against a lease agreement and other documents that support the costs of the lease property," says Kleynhans.

"For example, if the existing property receives a rental income of R10000 a month and there are expenses of R2000 against that, this gives the customer a net rent of R8000. Let's say the bond on that property is R7000 a month.

"The customer is left with R1000 before tax. Let's say the tax is 40%, then he is left with R600. That R600 will be taken into account for the new bond that is being applied for."

Article by: Nick Wilson -