Credit amnesty and the property market

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The aim of the amnesty is to reintroduce those consumers who have previously been unable to apply for credit due to negative listings, back into the market. While this is welcome news for those consumers as it provides them with the opportunity to once again access credit, it could come at a much higher cost.

Stricter credit vetting process

"Previously banks would base much of their credit rating models on a client's payment history, which will be far less detailed without the information provided by credit bureaus. Without access to this potential adverse information on a consumer's payment profile, it will be far harder for financial institutions to determine their risk or the applicants' ability to repay their credit. As such they will have to adjust their approach and methods of distinguishing between high and low risk lenders," says Adrian Goslett, CEO of RE/MAX Southern Africa. "This could result in the opposite effect that the credit amnesty was initially introduced to achieve in that if banks feel that they are acting within a higher risk environment, they will be far more cautious in reviewing applications, and will therefore be tightening up their lending criteria and could in fact grant less credit."

Bank representatives have gone on record saying that that the removal of the adverse credit records of consumers introduced unknown risk and agreed that in light of this, banks have to tighten their approach to risk. The assumption that the credit amnesty will make it easier to obtain credit is not entirely true as many credit providers will implement far stricter credit vetting processes.

Property market may slow down

Goslett notes that if the credit amnesty results in fewer loans being granted, coupled with the fact that consumers are already facing other external financial pressures such as the rising cost of living, it could result in the property market slowing down. "Faced with greater risk, banks are likely to also push up the cost of credit and lending rates on home loans as a protective measure. Consumers already have deposit requirements to contend with and further interest hikes predicted later this year, so even more additional costs will only keep them from the property market for longer," says Goslett.

While the credit amnesty applies to information retained by credit bureaus it will not affect the credit information that banks currently have on their existing clients. "Amnesty will have more of an impact on a bank's new clients; however most banks will have retained their own record of their existing client's payment profile and credit history, which they will take into consideration when looking at credit applications. The bank will have records of negative payment history, so removing adverse information at the credit bureau will not entirely clear a consumer's name. Credit providers will still be allowed to keep the adverse information on their databases, whether it has been removed from a credit bureau or not," says Goslett.

The information of current credit active consumers will still be retained by credit bureaus and will be made available to credit providers, so the amnesty will only impact consumers who do not have credit at the moment. There is also certain credit information that is exempt from the amnesty that will not be removed, such as SARS judgements, administration and sequestration orders, rehabilitation notices and debt review.

"While the amnesty will have an impact on some consumers, for others it will be business as usual. Those who want to purchase property in the future will still need to pay down their debts in order to increase disposable income and continue to save for a deposit before deciding to apply for a home loan," Goslett concludes.