Get that home loan!

Although we now have the National Credit Act — a piece of legislation that commentators generally view in a very positive light — there are still hordes of South Africans mired in debt and overspending problems. Nowhere is this more obvious, says Tony Clarke, MD of Rawson Properties, than in the housing market where many individuals who should be able to afford a home and qualify for a bond simply cannot do so as a result of overspending elsewhere.

Upwardly mobile, but mired in debt

"In our business," says Clarke, "we find that debt problems are particularly prevalent in the 26 to 36 year old age group, especially among those classified as 'upwardly mobile'.

"This is a tragedy: increased wealth, which should enable people to relax and enjoy life more, all too often has resulted in their becoming over-indebted and miserable."

The problem, in Clarke’s view, goes right back to the schoolroom: pupils are, he says, taught an interesting variety of subjects, but even at matric level are given absolutely no instruction in the handling (and saving) of money or on how to invest it wisely.

Stupid and dangerous debt

"We regularly come across credit-hungry consumers with up to ten credit and store cards as well as several hire purchase payments on motorcars and the like. They continue to maximise their debt at every possible opportunity — the National Credit Act has perhaps reduced the amount of credit the South African consumer has access to, but the consumer has a tendency to access most of that amount. The National Credit Regulator, which has an obligation to educate, has failed to make people understand how stupid and dangerous debt can be."

The National Credit Act is, however, still likely to make a big difference and its impact is beginning to be felt.

"The Act does ensure that a more responsible attitude is adopted by the credit provider. It forces him to look at the borrower’s whole financial situation, which can — and often does — involve a whole range of debts, often on luxuries not necessities."

Borrowers are far better informed about what they are committing to since the passing of the new Act, says Clarke, and the new legislation does ensure that inexperienced people are given full information on the total interest costs they are incurring, how it will be calculated and over what period. They are also informed about possible interest rate increases and warned that automatic increases in the amount of debt available are no longer allowed. In addition, they are told what extra services (e.g. insurance) may accompany their loan, but again warned that canvassing for such extra services is no longer permitted.

Rawson Properties agents, said Clarke, are now being trained to discourage buyers from over-commitment.

Don't over-commit. You'll get a home loan if you aim to:

  • spend 10 percent less than your total income
  • avoid any short term debts — pay cash
  • avoid converting short term debts into long term loans (a trap many fall into)
  • pay monthly instalments before you pay yourself
  • pay your highest interest debts first
  • pay interest bearing debts by the due dates so as to avoid extra interest
  • buy on credit only those items you simply cannot do without

Supposing, however, that the borrower is already seriously in debt, what then? Approach a debt counsellor, said Clarke, as their advice is based on hundreds of cases.

The rescue plan, he said, can involve spreading payments over a longer period or paying only the interest for a limited period. Creditors, including home mortgage bond issuers will almost always prefer to keep a loan alive rather than to lose money on cancelling it and trying to sell the assets.

"Let us hope," said Clarke, "that a new era in borrowing is about to begin and that the many extraneous debts on frivolous luxuries, which have prevented so many of our people from becoming homeowners, will now give way to regular, ongoing bond payments, thereby making us a truly home owning nation."

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