Variation in banks' lending criteria means bigger role for bond originators under NCA

Since their advent in 1999, bond originators have made a business out of taking the hassle out of securing home finance by helping homebuyers navigate the lending laws, doing the application paperwork and securing the lowest bond interest rate - all at no charge.

But now under the new National Credit Act (NCA), that role is set to expand.

Rhys Dyer, CEO of ooba, SA's leading mortgage originator that has placed 300 000 people in their homes with over R130bn in mortgages, says that the new legislation means consumers need greater advice and better guidance in meeting the more demanding application requirements for homeloans.

"This means an even bigger role for originators to advice people step-by-step what they need to ensure they will meet the new requirements, and to shop around the banks for the best deal.

"This is particularly true as early experience of the NCA has shown that there is wide variation in banks lending criteria so we have seen that people declined by one bank are often approved by another if the application is shopped around.

"In fact with two major banks we have seen decline rates actually drop since the NCA came into being meaning that many more people are getting approved now."

Dyer says that the biggest effect of the NCA is a longer application process as more information needs to be collated upfront but that he expects this to be a short term phenomenon as banks refine their processes and lending criteria to streamline the application.

"Longer term we expect there to be little effect on overall decline rates as banks will still lend and price for the increased risk based on the profile of each individual. The higher risk posed to the bank that they may not be able to repossess the property if deemed to have lent recklessly, will just be a factor built into the pricing models of the banks. Higher risk applicants will just receive a smaller rate concession, but will in most cases qualify for the credit. That is why it will be even more important to shop around for the best interest rate as the pricing models will also vary widely.

"There is therefore really no need for people to fear the NCA." Geffen notes that before the NCA, financial institutions measured the income of an individual and allocated about a third of that income to work out the size of a bond that could be obtained.

"Now a credit decision will only be made after a detailed analysis of a potential buyer?s financial position. This includes a breakdown of all of their expenses to get an accurate assessment of disposable income because that?s the amount the bond granted will be based on. So some borrowers will qualify for more and some less."

Dyer says that established, reputable mortgage originators are particularly well placed to aid people get all their paperwork in order and advise them what information they need so that they have the best chance of getting a homeloan - and for the amount they aspire to.

"ooba (as Mortgage SA at the time) has been preparing for the NCA for more than a year so we have put in place the systems, processes and training to cope with the changes."

Those applying for a bond now will have to produce evidence of their last three months earnings if they have an employer, or their last six months if they are self-employed.

They will have to reveal what credit cards, department store cards they own, plus the limit on these cards, the rate they are repaying outstanding debts; what goods, including cars, have been bought on credit and over what periods these agreements extend. Rates, taxes, electricity and property maintenance costs will also be looked if the buyer has an existing property.

Aspiring homebuyers will also have to detail what they spend each month too on discretionary expenses.

Geffen advises that consumers are still getting used to the NCA and often forget about some of their expenses or else have an unrealistic idea of what they actually spend.

"Common omitted information includes things like entertainment (eg DSTV), eating out, domestic salaries, children's extramural fees for sport, extra lessons, realistic amounts for petrol and the true costs spent on groceries.

"While it is more onerous to prove affordability, it is a really a useful exercise for people to sit down and analyse what they spend because a large number of people don?t actually know and are quite surprised by the outcome. The result is often a greater commitment to financial discipline."

Dyer says that it is particularly important for buyers to get pre-qualified to find out if they qualify for home finance and how for much under the NCA.

"This will give them certainty in knowing what they can afford and give sellers a greater deal of confidence in accepting an offer. ooba can provide a prequalification certificate free of charge and without any obligation."

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