National Credit Act too late for many!
As conditions in the domestic economy worsen, it’s become clear how important the affordability provisions in the National Credit are. The Act requires banks and other lenders to make a proper assessment of an individual’s ability to repay a loan before granting credit. A sensible approach to lending doesn’t guarantee a persons ability to repay the loan – other events can still cause hardship – but lowers the likelihood of future default.
But what about those who purchased homes and motor vehicles before the Act came into force? Many of them are under severe financial pressure right now. Gabriel Davel, chief executive of the National Credit Regulator, says that more than 300 000 people have already sought help to restructure their personal debts, and that more than a million are still waiting in the wings. To determine how serious the problem is we need only look at the repossession statistics from the major asset industries – houses and cars.
Mortgage payments in serious arrears
Although today’s prime lending rate of 15.5% is only a fraction of the 1998 interest rate high (around 25%) affordability is a major concern. According to Rael Levitt, chief executive of Auction Alliance more than 70 000 homeowners have missed two or more bond instalments. A further 25 000 homeowners are more than four instalments in arrears and in danger of losing their primary asset. This is a consequence of the national debt to disposable income reaching 78% earlier this year – and the debt repayment ratio creeping up to an historic high of 12%. Levitt says his group’s latest research confirms a 20% month-on-month increase in forced sales over the third quarter.
The rise of negative equity is also a concern. Negative equity exists when a homeowner owes more on his bond than the asset is worth. If you’d bought a home for R750 000 in June 2007 with a 100% bond then it’s unlikely you’d get R750 000 for the place if you chose to sell it today! If today’s market value is only R720 000 you’re already in a negative equity position.
Most bank indexes that track property prices indicate a real decline in house prices this year, and Levitt estimates as many as 1.1% of local homeowners could already be faced with this predicament. In the US it’s reported that approximately 14.4m homeowners are already facing the problem!
Motor vehicle repossessions on the rise
When Rapport recently wrote about the state of South Africa’s passenger vehicle market they referred to the car trade as being in a “state of emergency.” How do they reach this conclusion? Apart from new passenger sales numbers being down 30% year-on-year repossessions are on the rise.
Reports from the country’s major banks confirm that up to 7 000 vehicles are being repossessed each month. The hardest hit are those earning around R15 000 per month, with around 80% of all repossessed vehicles in the R120 000 to R140 000 price bracket.
The result is massive public auctions with as many as 1 000 vehicles on the ‘floor’ at any given time. With their clientele chasing after bargains on auction floors the second-hand car dealer is taking serious strain. According to Absa, executive manager of vehicle and asset financing, Marcel de Klerk more than 130 motor vehicle traders had closed their doors by September this year.
Time for some more amendments
Unfortunately the National Credit Act is not infallible. There are some provisions in the Act which allow borrowers to make ill-disciplined decisions, even today. In particular provisions around motor vehicle finance cause concern. Prior to the Act borrowers had to find a deposit to finance their car. Today they can purchase without a cent down. And in the past the maximum term for vehicle finance was 60-months. Today you can purchase a vehicle on a hire-purchase agreement with 72-months to pay. Purchasers are once again sacrificing sensible financing options in favour of the most expensive vehicle they can ‘afford’.
Analysts have warned that these long repayments periods will result in tears further down the line. The reason is many of the vehicles purchased with nothing down and 72-months to pay carry large balloon or residual payments. Take this example from an advertisement in the Sunday Times this weekend: BMW 3 Series at just R3 499 per month. To purchase the vehicle you need a deposit of R27 000 – to make monthly repayments for a period of six years – and find a final payment of R108 000.
This is certainly not the worst example we’ve seen… But the concern is that after six years your vehicle will probably have around 150 000km on the clock and simply wont fetch enough to cover the balloon payment. After 72 instalments you will still owe a final payment which exceeds the remaining value in the asset!
Editor’s thoughts:
When people get into financial difficulty they often blame the bank, the government or Reserve Bank governor Tito Mboweni. The truth is that with a bit of financial discipline most of these situations could be avoided. Why do so many South Africans buy beyond their means? Add your comments below, or send them to [email protected]
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