Changes in National Credit Act can affect property owners

Gary Palmer, CEO of Paragon Lending Solutions, says that the current situation has made it difficult for property owners who require finance as the banks are focused on unsecured lending avenues. "Changes to the Act are only expected in the next financial year as the NCA tries to prevent the rate of unsecured lending. This could make it more difficult for consumers who require finance in the future but for the moment those who have assets may have only considered unsecured lending."

Unsecured lending rates are growing

With the ratio of household debt to disposable income hovering near 78%, the NCR is worried about unsecured lending rates, which has been growing 31% year-on-year. "With the global economy still in murky waters and economic growth in developed nations slowing, some financial institutions are not confident that economic difficulties are over yet and have come out cautioning consumers of borrowing more money," says Palmer.

But according to recent media reports, the NCR indicates that some consumers have been denied secured lending by the big transactional banks and are being offered money through more expensive, unsecured credit instead.

Palmer says that unsecured lending continues to be the core focus of banks' lending policies and they are unlikely to shift their business models. "The South African Reserve Bank's recent interest rate cut by 50 basis points to 5%, which is aimed at stimulating the economy through consumer spending, is unlikely to cause the banks to change their lending strategies."

Secondary lenders must play a key role

According to Palmer the current environment allows consumers and businesses to capitalise on having more disposable income and those in debt benefit from lower interest rates as the cost of paying off a loan is lower. The banks continue to favour unsecured lending to capitalise on profit and some consumers have been turned down secured loans for higher yielding unsecured loans.

"Due to these factors, property investors who require asset-backed short-term liquidity for commercial purposes are often subject to lengthy processing and tougher lending criteria and may not be privy to immediate cash flow. This could jeopardise their business interests," Palmer says.

Because of this, secondary lenders need to play a key role in providing liquidity to the commercial market as they have the ability to lend money to asset-backed customers who need short-term cash flow. "Secured lenders are able to process applications quicker and provide asset-backed clients with financial solutions and a formal bank guarantee within seven days."

Palmer says that local property investors should not be deterred from securing finance against their assets as they can continue to grow their businesses despite resistance from commercial banks. Most reputable second tier lenders will be able to secure funding for commercial developments that may not have been approved by a commercial bank.