Between a Rock and the Credit Bureau
If you are reading this article chances are you are one of South Africa’s 18 million credit active consumers. You might have a mortgage to finance your property rental investment, a credit card, car finance or a store card or two. Ultimately you are loaded on at least one credit bureau. Consumer spending is vital to the South African economy; 60% of South Africa’s GDP is contributed by household expenditure.
The National Credit Regulator (NCR) reports that R219.24 billion worth of credit was extended to consumers during 2009, bringing the gross debtors book to a total of R1.13 trillion. The gross debtors book is the total value of all credit currently provided to consumers including mortgages (65.38%), secured credit (18.7%), credit facilitates (11.04%), unsecured credit (4.82%) and short-term credit (0.06%). The banks remain the biggest lenders with a market share of 89.35% of the R1.13 trillion.
It is fair to say that the consumer spending drives growth, with household debt to disposable income hovering around the 78% mark. In order to achieve long term sustainability, credit providers must balance granting credit against the consumer’s ability to meet the monthly repayments. Notably, only 56% of credit applications in 2009 resulted in the credit being extended and this deteriorated to around 50% for mortgages. Without accurate, relevant and independent credit information, credit providers would not have the ability to determine one consumer’s financial circumstances from another. This would effectively limit the extension of credit, as all consumers would be tarred with the same apprehensive brush.
Historically from the property investor’s perspective, banks were encouraged to lend aggressively allowing the investor to leverage themselves heavily against the rental income of the property.
In today’s market, banks are far more cautious; one of the criteria driving their decision is the credit worthiness and affordability assessment of the applicant. Equally, property investors are just as cautious when assessing prospective tenants. And successful property investors keep themselves up-to-date with the latest trends and tools to select and manage their tenants.
And to finish with the wise words of Warren Buffett, “I like to buy things I can understand. I do a lot of research on things.”
The more research you perform on your prospective tenant, the better your ability to place a suitable candidate.
Did you know?
A mortgage loan is most likely to default in the first 24 months.
A rental agreement is most likely to default in the first 3 – 6 months.
Conclusion:
Both mortgages and rental agreements default very early in their life cycle.
Recommendation:
Upfront credit and affordability assessments are non-negotiable.Each bank has unique in-house credit policies; one bank might decline an application which another bank will accept.
Both property managers and property investors have their own appetite for risk. A property investor who has the cash flow to allow their property to stand empty while waiting for a suitable tenant has a different need to the property investor who is cash strapped and relying on the rent to cover the next mortgage repayment
Conclusion:
One credit policy might be as strict as declining all applicants with adverse information but another policy might allow for negative information providing the data is older than 18 months.
Recommendation:
Property investors are entitled to a copy of their prospective tenant’s credit profile. The property investor can request the credit profile directly from TPN Credit Bureau or insist their property manager shows them a copy. Ultimately the investor is taking the risk by placing the tenant and should have the last say on accepting or rejecting the applicant.
All credit providers including banks are mandated to submit a monthly report to the credit bureaus detailing how each consumer pays their account.
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Property managers and investors registered with TPN Credit Bureau submit monthly updates to TPN detailing how their tenants pay the rent on a monthly basis.
Conclusion:
This [rental] payment profile is invaluable to the credit granting decision process as the credit provider/property manager or investor has a factual overview of the payment behaviour of the applicant. [Rental] payment profile behaviour information is based on reciprocity. All members submit data to receive data.
Recommendation:
Join the closed user group of property managers or investors through TPN. Property investors who outsource the management of their properties insist their property manager places quality tenants and can similarly insist the property manager maintains quality tenants by using TPN’s free rental payment profile services.
Story by Michelle Dickens (First published in REIM)
