Business Day reports the interview between Lindsay Williams of Business Day and Jacques du Toit economist with ABSA Bank.

” The new National Credit Act changes the way banks assess home loan applications with hopefuls now required to prove they have sufficient after-tax income to meet loan repayment obligations.

LINDSAY WILLIAMS: Jacques, what are the new rules imposed by the National Credit Act (NCA) on the banks? It says here in terms of the NCA applicants are now required to provide detailed information about their monthly income and expenditure, and full details of their debt obligations. What was the case in the past?

JACQUES DU TOIT: The banks had a “rule of thumb” where they provided credit or mortgage loans to applicants at up to 25% to 30% on average of their gross income. Now it’s based on total net disposable income – and that’s after deductions of all expenses, including all living expenses.

LINDSAY WILLIAMS: So in the “good old days” before 1 June 2007 one could go to the bank and say: “Here is my payslip – I earn R20,000 a month.” The bank would say “that’s fantastic” and grant you a mortgage on the back of that. Now you have to say: “I earn R20,000 a month, but I owe department store x this amount, and credit card x that amount – and so it goes on from there, requiring one to provide a balance sheet of exactly what one spends on a monthly basis at home:

JACQUES DU TOIT: Absolutely. One has to disclose all those expenses to the bank, and then they do an affordability calculation that reveals the net disposable income that’s left at the end of the day – they will then base the finance they provide to you on that. It also depends on your credit record with the bank – in other words your risk profile, your age and other variables.

LINDSAY WILLIAMS: The bank then has to provide you with a quotation that 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. That’s good news because it’s more transparent, and there’s also been a change with “initiation fees”?

JACQUES DU TOIT: Yes, there is a change. Some of those fees are much higher than in the past as far as I know so there’s definitely a change on that front.

LINDSAY WILLIAMS: The quote an applicant receives from the bank is valid for five days during which time one can source other quotes from competing financial institutions so that’s quite good news. So we are going to see a tightening of the mortgage lending practices of all the banks – that must be quite bad news for the residential property market I would have thought?

JACQUES DU TOIT: It could have an impact on the residential market. Although I don’t have that information so far this month, it could have an impact on the granting of mortgage loans – and especially with the five-day period where the client can decide which bank’s offer they want to take up.

LINDSAY WILLIAMS: Does this mean the period of a mortgage might be extended as well? Normally one looks at 20 and maybe 25 years – does this mean we could go out to 30 years or more?

JACQUES DU TOIT: It’s possible. Up to now we’ve already had that type of product in place where a mortgage loan can be extended up to a 30-year period. That’s not unusual at the current stage, and I think that will still be possible under the new legislation.

LINDSAY WILLIAMS: If you do extend your mortgage bond repayment to 30 years interest payments would be vastly different over that period – would it be fair to say that the banks would earn a lot more?

JACQUES DU TOIT: It will definitely be a lot more, but they’re also doing that in an effort to support applicants in terms of their monthly cash flow. Hopefully they will realise it’s much better to repay a loan in a shorter period like 20 or even 15 years if possible.

LINDSAY WILLIAMS: Have you found since interest rates started rising that the 30-year bond has become more popular?

JACQUES DU TOIT: I don’t have that specific information, but I would assume certain clients would have shifted to a 30-year period, or that mortgage loans might have been granted on that basis because of higher interest rates.

LINDSAY WILLIAMS: The new National Credit Act is a very good thing, but my impression and anecdotal evidence says this is going to have a far-reaching effect not only on retailer lending, but also on the mortgage business which is now the most competitive area in the South African banking industry according to the PricewaterhouseCoopers (PWC) banking survey. Surely the NCA will knock some people out of the market that maybe a couple of months ago would have been granted a mortgage bond?

JACQUES DU TOIT: Yes, that’s definitely possible. For people that are overextended after the 1 June implementation of the NCA they would find it a little bit more difficult to get credit, and especially in terms of vehicle finance and mortgage loans.”