SA Affordable Housing January - February 2020 // ISSUE: 80 | Page 38

FINANCE MATTERS
WHAT IS INTEREST AND AN INTEREST RATE?
• Interest is a fee the bank charges for lending people money.
• This fee is based on something called an interest rate.
• Interest rates are generally determined by the repo rate and the South African Reserve Bank has the mandate to set the
repo rate.
• The repo rate is the rate that the Reserve Bank charges commercial banks.
• The Reserve Bank’s mandate is to ensure sustainable economic growth and price stability for the South African
economy. assessment.
WHAT INTEREST RATE OPTIONS MAY BE AVAILABLE TO ME AS A CUSTOMER?
• Getting a preferential rate is dependent on the customer’s individual risk profile and credit record.
• To arrive at the individual rate, the bank is required to perform an affordability assessment before granting credit as
required by the National Credit Act.
• The National Credit Act also regulates the maximum interest rates that commercial banks may charge customers.
• For Home Loans, banks will look at a number of factors when assessing the customer’s application for a home loan,
including:
• Income
• Actual expenses
• Credit Profile or Credit Record
• Current credit exposure (how much debt you currently have or are owing to creditors)
• The term of the loan
• Amount of loan being applied for
• The property to be mortgaged
• Whether you have a deposit or not
THE CHALLENGE OF AFFORDABILITY
• Whilst credit records, conduct of accounts and actual monthly budgets play a key role when assessing home loan
applications, affordability accounts for the largest portion of customers’ home loan applications being declined.
• In cases where applicants have healthy credit records and good financial conduct, some simply cannot afford the
monthly instalment based on their actual living expenses as measured using a detailed affordability assessment.
• Banks’ affordability assessments are in line with the requirements of the National Credit Act, 2007, as amended.
• The NCA has significantly changed the approval landscape, rightly so to protect both customers and the banks from the
effects of reckless lending.
• So, the simplistic repayment-to-income measurement has evolved to a more realistic understanding of a customer’s
actual financial circumstances.
Pierre Venter is the general manager, Human Settlements in Market Conduct Division at the Banking Association South Africa.
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