Finance Minister Pravin Gordhan launched a strong attack on financial institutions, which he referred to as “greedy monsters” that put profits before the wellbeing of the people they are supposed to serve
He referred mainly to the economic meltdown in 2008 but failed to mention the current crises being created by short term and unsecured lending. It appears that lenders are favouring “fast” money. These credit lines are characterised by high interest rates (reaching up to 60% per annum) for unsecured loans repayable over shorter periods which range from 3 months to 5 years. In comparison, a bond repayment period is usually extended over 20 years, with interest rates currently ranging between 9 and 12% per annum. Recent statistics reveal that the rand value of unsecured lending is on equal par to that of secured lending.
With some 2,2 million South Africans in need of a home, it is a concern that mortgage approvals rose by a mere 4% in the past two years. This stands in stark contrast to unsecured lending which rose by 54% over the same period. We are unsure how the National Credit Act and ‘risky’ lending policies are applied. My Budget Fitness has therefore introduced the HomeOwnerPropertyEducationSchool as a service to prospective buyers to improve their chances of obtaining home loan finance. Attendees are shown how to improve their credit rating and affordability.
They will learn how to increase cash flow by reducing monthly credit commitments through hands on education and training. We regularly encounter clients who have unsecured loans that are 4 to 5 times larger than their monthly salary. Prospective buyers who are over indebted with unsecured loans will quite often find their home loans declined. It appears that, since the introduction of the NCA, the general public is not necessarily receiving more protection against reckless lending, but rather just faster ways to obtain debt as lending institutions have developed advanced technology to expedite the approval of an unsecured loan.
One recent example is a client whose home loan was declined due to debt impairment and over-indebtedness. Joe (not his real name) borrowed R 9 000.00 from A Bank to pay back a loan taken out from C Bank 2 months ago. The loan from the first bank was a 4 month loan and cost him R2 400 per month. When Joe realised that he was struggling to pay the R2 400 per month, he then took up a new loan of R9 000 with another bank, with a repayment period of 8 months, which costs him R1 600 per month. His new monthly repayment is now less that the first loan, but in effect the new loan will cost him R12 800 in interest over and above the capital of R9 000.00 that has to be paid back by the end of the loan term. It will come as no surprise if he borrows a larger amount after 8 months to pay back the balance then due.
The rapid increase in unsecured lending increases the debt burden and has a negative effect on the credit profile of the people who are most desperate to own their own home, those that want to buy a house in the price range between R250 000 to R600 000.
In the current “affordable home loan” market, for every 1000 interested buyers, a property developer can expect to convert an average of only 40 into home owners. The search for mortgage finance by a prospective home owner may start with online research on how to obtain a home loan, as some websites offer home loans even to “blacklisted” customers. If you visit your bank or work through a mortgage originator you will find that banks are in an extensive campaign to out-do its competitors to provide more attractive banking packages. However with interest rates being the lowest in many years, in the affordable home loan market more that 65% of all home loan applications are still turned down. Property developers say that they have to sell the same house three times before the bank will approve the buyer for a home loan. The lack of affordability to service the required bond repayments and impaired credit behaviour appears to be the main reason why bonds are declined in the affordable market, such being household incomes that earn below R16 000.00 per month.
We conducted a study over the past 4 years to show why home loans are declined and decided to offer a service to prospective buyers by guiding them through the basic steps on how to buy a home. We realised we need to introduce education and budget behaviour which started the concept of ‘HomeOwnersPropertyEducationSchool’.
In the School we show the prospective buyer how to buy a home with reference to the A B C, such being special focus on Affordability, Behaviour and Castle, the latter being the property and or deposit offered as security if required.
As the foundation, home ownership education to the prospective buyer is supported by Setsmol, a company specialising in home ownership education for clients of Standard Bank, ABSA, FNB, and Anglo Mines. The service and experience of Setsmol, who has been involved in home ownership education for more than 10 years, is invaluable as Setsmol has trainers throughout South Africa, and can perform the training in most of the official languages. E- Learning, which was recently introduced through the collaboration of another group, expands the service and enables the participant to work through a series of web-based training modules in support of the home ownership education.
We need to enable a client who participates in the education programme to change his credit spending behaviour. First we discuss the client’s goal – and then work out a plan to reach the goal. The goal of the client is usually linked to the purchase price of the property he wants to buy.
With the client’s collaboration we then analyse and capture his monthly budget and debt exposure through a Budget Calculator. A revised budget will be prepared for the client with the aim to meet his goal. Not every goal and time period will be the same as each client has different debt exposure, income and surplus funds that need to be worked with. The client usually participates for a period of 6 months or longer in the programme and receives mentorship and education on a regular and structured basis.
A tool to track expenses through a mobile phone was developed. We found that few clients actually have a budget and manage their salaries and expenses on a structured manner. We thus had to provide a tool to assist the clients to make the budgeting easy, which is why we developed the mobile2budget tool to capture each rand that you spend through your mobile phone. Since not every customer has a smart phone the challenge was to develop a tool that can relay a budget expense through a USSD or a WAP message to ensure that any type of phone can use it. With Mobile2budget you can first create your own budget, and then capture each rand that you spend by using your mobile phone. Messages are sent in an electronic format to a ‘back office’ electronic bookkeeping system that captures each expense in a particular category, such as food, entertainment and petrol and 25 other expense categories. You can view your expenses by logging into the website and soon adjust your expenses as you become more aware of your actual spending.
To enable you to stay within your budget, your personal trainer and mentor will engage with you on a regular basis to assist with planning and suggest changes to ensure that you stay within your budget. Only once you really know how much money you waste on unnecessary items can you start to adjust and trim your budget. In doing so you will start to reduce your debt and thus improve your credit rating and profile. We are amazed how our clients change their behaviour and regularly phone us to announce, “I have just received extra money and used this money to reduce debt that used to keep me awake at night – I am now closer to reach the dream of owning my home.” Prior to enrolling in the education programme, they would have spent that extra money over the weekend.
The concept to rent a property with the option to buy also forms part of other products developed over the past few years. With rent2buy, the prospective buyer will rent a property and pay rental that is equal to a bond repayment, plus rates and taxes. Additional rental payments, over and above the market related rental, can be credited to the purchaser to enable him to build up a savings account during the duration of the rental period. It is required that the rent2buy tenant participates in the budget fitness rehabilitation for the duration of the rental period. Not every client whose bond has been declined will be able to rent a property with an option to buy, as the client must first pass the rent2buy required affordability and credit behaviour test.
During the 6 month period in the School, the client receives the assistance of the budget fitness mentor, a bespoke personal budget, a budget calculator, home ownership education, E- Learning and the mobile2budget tool. These work together to support the quest to become a responsible borrower who will understand the responsibilities of managing a budget, servicing a mortgage, rates and taxes and understands the obligations of a home owner. One of our main objectives is that, once a property is purchased, the owner must not lose the property. After all, your home is your castle! One major bank has already engaged in a pilot project and many property developers are also participating. They realise the value of education, which is the key to responsible and sustainable lending.
Meyer de Waal
My Budget Fitness
021 461 0065 / 083 653 6975
Gustav Zwiegelaar of SA Home Loans uses a simple analogy to illustrate the three basic requirements of a successful home loan application. These are incorporated into the school curriculum to illustrate the basic principles of a credit decision to prospective buyers so as to help them meet the credit requirements of lending institutions. We call it the A B C of a Home Loan application.
So what are they?
A – Affordability: A savvy home loan provider must look at all financial responsibilities and commitments and see whether there will be sufficient net income to meet these as well as repay a home loan and have a surplus for unforeseen circumstances. This is done by scrutinising banking account statements and salary slips as well as personal credit reports.
B – Behaviour: Home loan providers look at how potential clients honour other credit agreements, such as clothing accounts, vehicle purchase agreements, service agreements and so on. This is also obtained from an independent credit report. Specific behaviour is often reflected in banking account statements. This may be in the form of good credit balances on the one hand, or returned debit orders on the other.
C – Castle or house: (As per Gustav he is taking some literary licence here – we know your home is your castle) There has to be sufficient value in the property to at least meet the value of the loan, and preferably a little more. As such the availability of a deposit may improve your chances to obtain a home loan. However, some banks do offer 100 % loans, depending on your credit and risk portfolio. Gustav says, “If I had money for every time I have been told that there is so much value in an applicant’s property and we can just take it back if the repayments are not made, well, you can guess the rest. The truth is that we are not in the business of taking and selling homes. We don’t want to. It is important that all three factors are satisfied in order to extend a loan.” That is simply a responsible approach.