What is reckless lending?

Michael Buxmann (PGDFP), a financial planner at Nedbank Wealth, responds:

Reckless lending applies to any individual who is experiencing financial trouble due to the practice of negligent lending from credit providers.

Let’s start of by looking at the law: The development of reckless lending can be identified by looking at three minimum requirements that credit providers need to adhere to before entering into a credit agreement with a consumer.

Firstly, the law states in the National Credit Act: “Prior to entering into a credit agreement with a consumer, the credit provider must conduct a detailed financial assessment on behalf of the client. Should the credit provider fail to conduct such assessment, any credit agreement entered into between the credit provider and the consumer is classified as reckless lending or reckless credit irrespective of what the outcome of the assessment might have been.”

A detailed financial assessment on the consumer’s monetary affairs is nothing else than an analysis of the consumer’s monthly income, expenses and obligation towards existing debt. The process will provide the credit provider with an up to date snapshot of the consumer’s disposable income and cater as a sustainability and affordability test.

It’s ultimately impossible for a credit provider to do sustainable business without examining whether a client will be able to service the monthly repayments (capital plus interest) over the term of the loan.

Secondly, the law states: “Should the credit provider conduct an assessment and conclude that the consumer does not understand the risk, cost and obligation created by the proposed credit agreement, but still enters into the credit agreement with the consumer, such credit agreement is classified as reckless lending or reckless credit.”

Each individual’s knowledge on financial products and services differ, it is therefore necessary that the product provider determines if the consumer understands the risk of taking on additional debt, consequently having less money available to support his/her lifestyle.

What’s the true cost of the credit agreement? These can consist of an initial fee, monthly service fee plus the interest and capital settlement in the form of monthly repayments (obligation).

For example:

Loan Amount: R250 000.00
Loan Term: 84 months
Interest Rate: 22.40%
Monthly Service Fee: R68.00
Initiation Fee: R1 197.00
Total Repayment: R505 270.00

(The above calculation is only for illustration purposes.)

Lastly, the law states: “Should the credit provider conduct an assessment and conclude that entering into the proposed credit agreement would cause the potential consumer to become over-indebted, but still enters into the credit agreement with the consumer, such credit agreement is classified as a reckless lending practice.

In conclusion, if a consumer cannot sustain his/her normal lifestyle after the monthly repayment of the credit agreement he/she will suffer a shortfall and become over-indebted.

Understanding the functioning of debt as well as the costs thereof on your current lifestyle is one of the most important things to think through before you enter into a credit agreement with a credit provider.

Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers. Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.

http://www.fin24.com/Money/Money-Clinic/Debt/what-is-reckless-lending-20170207

 

Average cost to build a new house up almost 7%

Feb 17 2017 18:56

The struggle to deliver affordable housing remains a challenge as the costs for a 50 sm home is +/- R 222 000.00 – and this is for the construction costs only – not considering the cost of the plot – read more in the article below –

Meyer de Waal

Article written by Carin Smith

Cape Town – The average building cost of new housing constructed in 2016 increased by 6.9% to an average of R6 614 per square metre compared with R6 185 per square metre in 2015, according to Jacques du Toit, property analyst at Absa Home Loans.

Average growth in building costs has been about 9% per annum in the past ten years compared with an average headline consumer price inflation rate of 6.3% per annum over the same period.

The average building cost and the year-on-year percentage change per square metre for houses smaller than 80m² was R4 436 (up by 14.7% from R3 869 in 2015); that of houses of 80m² or bigger was R6 683 (up by 4.7% from R6 383 in 2015); and that of flats and townhouses was R7 659 (up by 6.2% from R7 213 in 2015).

Residential building activity is expected to remain largely subdued in 2017, according to Du Toit.

He said this is against the background of the continued relatively low level of consumer and building confidence, as well as recent trends and the outlook for the economy and household finances.

“Levels of building activity in the SA market for new housing remained largely subdued in 2016, which were in line with trends since 2009 when the economy experienced recessionary conditions,” said Du Toit.

“The planning phase of new housing, as reflected by the number of building plans approved by local government institutions, showed some contraction last year compared with 2015. The construction phase of new housing – that is the volume of housing units reported as completed – recorded growth of much in line with that of 2015.”

READ: Building a house now costs 7.5% more

 

The number of new housing units which gained building plan approval was down by 6.4%, or 3 836 units, to 56 143 units in the 12 months up to December last year compared with a year ago. This came to only 54.7% of a total of 102 691 plans approved ten years ago in 2007.

According to Du Toit, the drop in building plans approved in 2016 was largely the result of a combined decline of 16.5%, or 6 550 units, to a total of 33 214 units in the two segments of new houses. However, the number of plans approved for new flats and townhouses increased by 13.4%, or 2 714 units, in the 12-month period.

The volume of new housing units built increased by 4.6%, or 1 820 units, to 41 489 units in 2016 from 39 666 units constructed in 2015. This improvement in the construction phase was mainly the result of growth of around 19%, or 2 198 more units built in the segment for flats and townhouses to a total of 13 691 units last year. The two segments of houses showed a combined decline of only 1.3%, or 375 units, to 27 798 units in 2016.

The real value of plans approved for new residential buildings increased by R289.8m, or 0.6%, to R50.72bn in 2016, with the real value of new residential buildings reported as completed increasing by R629.5m, or 2%, to R32.79bn last year. These real values are calculated at constant 2015 prices.

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5 things first-time home buyers should know

Buying your own home can be a daunting prospect. Many of us have spent our lives renting, so when we decide to take the step up to owning property we often aren’t quite as prepared as we should be. With this in mind, we sat down with Meyer de Waal, owner of My Bond Fitness and a property conveyancing attorney and also an exhibitor at the upcoming Property Buyer Show in April, to figure out exactly what a first time home buyer should know before signing on the dotted line.

1. Become an Expert

The first thing many of us do before we buy a new mobile phone, TV or even a pair of running shoes is we research. We look up the product online, compare specs and read countless reviews before finally making our decision. You would think most of us would do that on the biggest purchase of our lives – a house. The thing is, we don’t.

Meyer suggests that not only should you research the housing market extensively, comparing properties in your desired locations, but also get a Comparative Markey Analysis (CMA) to compare the price you are being asked to pay with other prices in that neighbourhood. More often than not the estate agent involved will offer you a 1-piece brochure with information on the property – don’t be afraid to request more! Buying a house is a 20-year commitment and one that should not be entered into lightly! A good agent will assist with sales trends/comparison of apples with apples in the area using systems such as PropStats by the Institute of Estate Agents of South Africa (IEASA).

Lightstone, an exhibitor at the Property Buyer Show, provide buyers with a website where they are able to obtain a CMA on the property they are interested in. It is important to remember that property trends to fluctuate, so the CMA is just a guideline and not an accurate representation of the property market.

2. Check Your Credit Score

The major stumbling block in most property sales is financing, with only 1 in 4 home loans being approved. What many of us do not realise is the importance our Credit Score plays in this decision. Your credit score will determine the rating the bank and other financial institutions give you after examining how you have handled credit in the past. If you have a “thin” profile and little or no debt, it generally means you have little information the bank can analyse and you may find it strange that the bank may request that you first open a store account to establish a credit profile and then come back to them

If you are in the market for a new home, there are many online sites where you can personally check your credit score, this will help you to work out how much you could qualify for. By knowing your credit score, you have the chance to improve it over time. This could potentially save you up to 30% on your bond payments. It is always important to be cognisant of your future purchases and how these can affect your credit score. For a quick and free online check – go to www.mybondfitness.co.za or the Credit Bureau online.

3. Size Matters

After you have found out your credit score, you can check your affordability. This takes into account your income and expenses, working out the size of the loan you could potentially get from the bank. Knowing how much you could possibly borrow makes the entire process far simpler. “Most agents will show a client several houses before they decide on the one they really like,” Meyer explained. “After the potential owner has decided, the agent goes about running all the necessary checks, including their credit record and what they could possibly afford. By knowing exactly what you can afford before beginning your search you not only remove the risk of falling in love with a house you can’t afford but also improves the chance your agent can find you one you will like in your price range.”

4. Budget Before You Buy

As simple as this may sound it can truly save you in the long run. When thinking of buying a home take an honest look at your finances. Replace your monthly rent with the potential bond repayments, as well as costs like house insurance, rates and taxes, levies and property maintenance. All these costs add up and could put a strain on your monthly income.

Budgeting for other costs like the bond registration fee and transfer costs can also spiral out of control. Use something like Avid Firefly, an application that works out the possible costs involved in the purchase of your home.

There are also plenty of personal budget apps out there, like Mobile2Budget, which make controlling your finances so much simpler. Try one out for a few months to see exactly where your money is being spent!

Establish if you can qualify for a subsidy from the Government as a fist time home buyer under the FLISP initiative.

5. Working Hard For Your Money

Getting a home loan is a difficult business and can be made even more challenging depending on how you’re employed. A full-time employee with a constant pay cheque is a far more attractive prospect for any lending agent than someone who is self-employed or commission-based.

If you are self-employed or work for commission contact a home loan consultant before you consider buying. There might be some serious red tape you need to get around and the last thing you want to do is lose out on your dream home because of delays with your bond approval.

This article was also published in HomeTimes

Real Estate Investor Magazine

Property 24