Why the National Credit Act will not affect you

Notwithstanding the advent of the National Credit Act and the provisions thereof that make banks legally responsible for checking an individuals full credit history and situation, i.e. income and expenses, before granting finance, the banks will still use the 30 per cent rule as a guideline in processing applications. The 30 per cent rule pertains to the rule of thumb guideline that banks use that your monthly bond repayments should not be more than 30% of your gross monthly income.

It is important to note, however, that the National Credit Act does not apply to a mortgage loan agreement in respect of which the consumer is a juristic person (Close Corporation, Company or Trust) whose turnover or asset value exceeds R1 million at the time of the application for credit.

In other words if you are a property investor that has purchased properties with an asset value of over R1 million in a Close Corporation, Company or Trust and you seek to purchase further properties in the Close Corporation, Company or Trust, you will not be subject to the provisions of the Act and the banks will not be legally required to do a stringent assessment of your personal income and expenses. The application for finance will be the same process as you followed before.

It is important to remember this exclusion because on my most recent property deal that involved the purchase of a block of flats in a Close Corporation, I was asked by the bank to submit a list of personal expenses as well as provide them with 3 months worth of bank statements. After I pointed out to the bank that my transaction fell outside the ambit of the Act, the request was dropped and the finance granted.

Given the advent of the National Credit Act it is more crucial than ever to buy properties in a properly constructed investment structure. For more information on investment structures please click on Step 2 of the website: Investment Structures.

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