The National Credit Act (34 of 2005) and why it will not affect you
What is the NCA?
The NCA is legislation designed and implemented to regulate the credit industry in South Africa. The bond over a property is a credit agreement and is therefore governed by the provisions of the NCA in certain circumstances.
How does the NCA affect your rights as a borrower?
When the NCA came into effect there was enormous concern among property investors that they would struggle to procure bond finance to purchase more properties. The concern is unfounded, however, if your investment structures are properly set up. The reason for this is that NCA only applies to the following borrowers:
- NATURAL PERSONS: means individuals that borrow in their own name
- JURISTIC PERSONS: means partnerships, close corporations, companies and trust with an asset value or turnover of less than R1 million.
It is clear from the above that the NCA primarily affects you if you purchase property in your own name. Even if you do buy in your own name it does not mean that you will not be granted finance. It simply means that the bank cannot use the 30 per cent rule as a guideline in processing your bond application. The 30 percent 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. If you borrow in your own name the banks are obligated to check your full credit history and situation i.e. income and expenses before granting finance.
WHAT IS THE IMPACT OF THE NCA IF YOU DO BORROW IN YOUR OWN NAME?
- You will not be subject to reckless lending. The bank will not lend you more money than their credit department believes you can comfortably repay each month. If they do, they could find themselves in trouble with the national credit regulator and the bond agreement could be set aside.
- The bank must provide an upfront quote before the bond agreement is finalised. The quote must contain the full cost of the credit i.e. it must clearly set out your monthly bond repayment, how much of the payment is interest and how much is capital repayment, and it must show the total amount of interest and fees payable over the life of the bond agreement.
- The language in the bond agreement must be simple and understandable. This means that the days of convoluted bank documents full of Latin and draconian legal terms are over. The document must be easy to read and understand.
- The bank is obligated to give you written reasons if your bond application is denied. Prior to the NCA the bank could simply say no. If the reason is a poor credit record you have the right to demand to see your credit records.
- Given that the bank could have the bond agreement set aside if it is proven that they lent recklessly, the banks are far more cautious who they lend money to and how much they lend. It is for this reason that it is very difficult to procure bond finance to purchase multiple properties if you are buying them in your own name.
How do you procure bank finance to purchase multiple properties?
As set out above the NCA primarily applies to you if you purchase properties in your own name. If you are a property investor that has purchased one property or multiple properties with an asset value of over R1 million in a Close Corporation, Company or Trust then the NCA does not apply to you. Given the price of properties it is not difficult to meet the R1 million threshold. This means that if 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 and the bank will no doubt revert to the 30% rule to gauge your borrowing potential.
Given the impact of the NCA on buying in your own name, it is more crucial than ever to buy properties in a properly constructed investment structure. If you approach the bank with a properly constructed investment structure that falls outside the ambit of the NCA there is no reason why the bank will not continue to finance the growth of your property portfolio.