UPDATE: 05/03/2014 The Department of Trade and Industry is going ahead with implementation of the National Credit Amnesty. From 1 April 2014 all credit agencies must clear the negative credit information of those clients who have settled their debts. Read More
UPDATE: 21/10 Since posting this article the Amnesty has been approved by government and discussions regarding its implementation are going ahead. Read More
UPDATE: 04/11 The Credit Ombudsman’s press release about misconceptions consumers have around the proposed Removal of Adverse Information Project. Click Here
The credit amnesty proposal being put forward by South Africa’s Department of Trade and Industry and the National Credit Regulator is gaining support in government and many insiders believe its implementation is a foregone conclusion. But will it have the effect that legislators hope? Credit Providers say no.
The proposed amnesty, which will come into effect as early as November of this year if government has its way, will be a “once-off complete removal of adverse credit information” and is designed to benefit nearly 1.6 million South Africans with impaired or negative credit histories.
In the current economic climate the banks of South Africa are risk-averse and will often reject loan applicants out of hand for even minor defaults (i.e. retail account “late payments” or “unpaids” etc.) reflected on their credit histories. As access to credit is seen as being important for individuals to be able to participate in the economy and grow their, and thus the nation’s, wealth it is not hard to see why the government is pushing for this amnesty.
While there may be legitimate economic reasons for implementing this amnesty some more cynical commentators look to the upcoming National Election as the true reason for the current shape of the plan and the pace at which it is being implemented: apparent relief for indebted voters might score South Africa’s ruling party, the ANC, some important political points just before the election.
What are the implications for the home loans market?
Cas Coovadia, who is the managing director of the Banking Association and thus the voice of private banking in South Africa, recently responded to that very question in Daily Dispatch with the following:
“How can banks lend money to people if there is no information in the credit bureau? Either banks won’t lend money or they will price for the additional risk.”
On the surface an amnesty might seem to offer a quick fix by opening up the lending floodgate but in practice it is expected to compound the problem by forcing the banks onto an even more defensive, risk-averse footing.
If the banks find themselves in this position their most likely course of action, as outlined by Coovadia, will be an end to below-prime lending which is already a trend in today’s market. Lending rates and bank fees will likely skyrocket as banks seek to increase returns to reduce their own risk and cover losses from inevitable defaults. In the not too distant future banks might only offer lending rates at or below prime to clients who are already on their books with proven positive credit histories.
Another more extreme solution, one that may prove to be the inevitable final result of the current Amnesty plan, would be for any given bank to offer loans only to its established clients and to forego offering finance to non-clients or clients with no credit history. This would leave many young professionals just starting their independent financial lives and any otherwise attractive clients without credit histories out in the cold as these types of clients will be unable to gain access to credit.
This course of action would end the already limited competition between the banks which would only mean further increases to the rates and costs paid by the private individual when doing business with the bank.
What does this mean for you, now?
Even though the current credit climate is not as pleasant as we would like it is about to get much worse: we feel that there is definitely a storm on the horizon. It would only be to your benefit to apply for your home loan now before the amnesty comes into effect and the predicted storm breaks.
If you apply now you will still have access to lower interest rates and may, depending on your personal profile, be able to secure an interest rate below the prime lending rate. You will also still have the opportunity to approach multiple banks in an attempt to find the best offer and service. All these opportunities are likely to vanish in the near future.
Finally, having established yourself with a bank before the amnesty comes into effect will allow you to begin to create a positive credit history and thus signal your low risk status, which will be essential for your future dealings with any credit-granting agency (e.g. Bank, Retailer etc.)
If you were holding out for lower rates or waiting on that dream home it may be time to rethink your position.
If you do decide to apply for a loan before the Amnesty please feel free to contact us for assistance.