Good News for Home Loan Applicants

“Gone are the days when the average person could put a decent deposit on the table when purchasing a property; these days people need to borrow more in order to buy their own home”, says Bruce Swain, MD of Leapfrog Property Group.

Getting the financing required has been a problem over the past few years as banks heightened their lending criteria in the wake of the US property bust, leading to more potential buyers being forced to rent as their home loan applications were denied.

The property market is now slowly recovering and, according to BetterBond Home Loans the average purchase price has risen from R870 454 in August 2012, to R956 166 in August 2013. The average deposit required has fluctuated more going from R167 927 in 2011 to R171 940 in 2012 before dropping again to R167 799 this year.  But is it any easier to obtain a mortgage today?

The Turning of the Tide

Staying with BetterBond’s latest figures it would seem that this situation is now changing for the better; in August 2011 BetterBond’s average overall approval percentage sat at 46.62%, during August 2013 this rate has almost doubled to 80.18%.

BetterBond CEO, Shaun Rademeyer believes that it’s worth noting that; “although the initial decline rate dropped in September, more than half of the home loan approvals that we have achieved over the past year have only been achieved on submission of the application to a second or even third lender”.

“At the moment it’s definitely a matter of not just accepting the first answer from a bank”, says Swain, “our agents have found that an application denied by one bank is highly likely to be accepted by another – should the buyers paperwork and deposit be in order, and their credit records clean”.

A Possible Fly in the Ointment

On the 5^th of September Cabinet issued a three-paragraph statement in which it mentioned what it called the removal of adverse credit information project. The endeavour has since been dubbed the Credit Amnesty and, according to the Cabinet statement the amnesty “"seeks to address the issue of access to credit to those South Africans that can afford credit. These are consumers who may have paid their debts in full and are in a position to afford credit but whose access is currently impeded by negative credit information on their record."

While no date for the amnesty has yet been released, Rob Davies, Minister of Trade and Industry, invited public comment on the proposal on the 30^th of September. The plan includes the following:

• Removal of all adverse information listings held by credit bureaus irrespective of value and irrespective of non-payment;
• Removal of all paid-up adverse information listings by credit bureaus on an ongoing basis;
• Removal of all paid-up judgments information held by credit bureaus on an ongoing basis.

Natasha Horwitz, Executive Manager of the Credit Bureau Association (CBA) explains the possible implications of the proposal; “The CBA’s concern is that many consumers may mistake the Credit Information Amnesty for a blanket debt pardon, and that is not what the amnesty is. Consumers must know and understand that even with the amnesty, loans, accounts and other forms of credit must still be serviced on an ongoing basis until the debt is paid up. This is very important”.

Horwitz goes on to note that 64% of the beneficiaries of the first credit amnesty granted in 2006, went on to accrue more debt, and that 48% of these defaulted on a loan or had another judgement brought against them within the next five years. 

The Way Forward

 “While the proposed credit amnesty could mean that people who have paid up their debts will be able to access finance sooner, it could also lead the banks to tighten their lending criteria once again – in order to avoid a similar situation to that of 2006, thereby adversely affecting home loan applicants”, believes Swain.  

He goes on to indicate that the best option for home loan applicants is to ensure that their credit record is spotless. Should they have had a judgement issued against them, it would be in their interest to have it removed as soon as possible, before applying for a mortgage.

“I’d also recommend that buyers make use of a mortgage originator to help them with the application process, especially in light of the fact that banks could restrict their lending again”, says Swain, “these guys know how to compile applications and, will make the submission to more than one bank – dramatically increasing the chances that the application will succeed”.