On 6 May, the Limitations on Fees and Interest Rates Regulations, in terms of the National Credit Act, came into effect. These amend interest rates and fees that credit providers may levy on home loans, credit and store cards, and unsecured credit transactions
In November last year, the government announced changes to the maximum fees and interest rates that may be charged on certain credit products. This includes home loans.
It is important for estate agents and developers to be aware of what is changing and to understand how their clients may be aﬀected after 6 May.
“Under the National Credit Act (NCA), the regulator is obliged to review the maximum interest rates and fees every three years, but this is the ﬁrst time they have changed them,” explains Bridget King, a director at law ﬁrm Cliﬀe Dekker Hofmeyr. “I think the new limits have been put in place in anticipation of interest rates rising.”
In the case of home loans, this table (right) explains how the calculation for the maximum interest rate will change.
Practically speaking, that would result in the following maximum rates at diﬀerent points in the interest rate cycle.
In a low interest-rate environment, the old formula results in a reduced maximum cap. On the other hand, King explains, the formula to be applied after 6 May is more beneﬁcial to homebuyers when repo rates are higher.
However, it is also clear that whichever formula you use, the maximum levels are actually unlikely to be tested. With the repo rate at 7%, the prime lending rate is 10.5%. That means that a 19% interest rate would be prime plus 8.5%. Currently, nobody lends at those kinds of rates in South Africa.
MARKET FORCING COMPETITIVE RATES
“On our side, the highest rate we would look at is probably prime plus 3%,” says Zakheni Dlamini, director of business development at SA Home Loans. “We know that other lenders may go higher than that, to about prime plus 5%, but that is well below what is allowed.”
The reason for this is primarily that the market has forced lenders to compete. “The legislation tries to protect against abuse and overcharging, but beyond that the market has taken over. Competitive forces have eﬀectively kept the rates in a reasonable range for consumers,” he says.
Alan Hargroves, chief operating oﬃcer at Absa Home Loans, agrees that average lending rates for mortgage agreements are “at or near” the prime lending rate, and therefore new home buyers are unlikely to be aﬀected by the change in regulations. However, there are times when higher interest rates may be applied.
“If a customer goes into default and restructures the loan after a prolonged period of non-payment, it is theoretically possible for a bank to negotiate a higher interest rate. Under this scenario the bank is also bound by the Act to ensure that caps are not exceeded,” he says.
IMPACT OF NEW LIMITS
For the most part, however, estate agents can advise their clients that the new limits are unlikely to impact anyone applying for a home loan. Potential homeowners should put themselves in a position to get the best rates through the usual channels.
“Tips for clients to ensure they are able to qualify for a favourable rate would include keeping their credit records in good standing, timely and continuous payment of their existing contractual commitments, and saving up a deposit,” says Timothy Akinnusi, Nedbank’s executive head of home loan sales and client value management.
The new regulations also allow lenders to charge higher initiation and monthly service fees on mortgage agreements. The table below shows how these fees will change.
These amounts are fairly small, particularly in relation to the other costs related to buying property. And given the modest increases, consumers should expect all lenders to charge the maximum amount allowed automatically.
“It’s fair to assume that everyone will default to the maximum fees,” says Dlamini. “Bear in mind that those fees have been ﬁxed ever since the NCA came into eﬀect in 2007, but there has been inﬂation in terms of the cost base of the lenders.”
He suggests that, if the allowed increase had been much larger, lenders might have used the opportunity to diﬀerentiate themselves by not all raising their fees to the highest possible level. Because the increase is so small, however, it’s likely everyone will apply the maximum rate.
Words Patrick Cairns