Protection for Homeowners against Various Interest Rate Hikes

• Jurisdiction: South Africa
• Date: 25 May 2019
• Published date: 25 May 2019
• Pages: 27-49
• Citation: (2010) 22 SA Merc LJ 27
• Author: Michelle Kelly-Louw

Protection for Homeowners against Various

Interest Rate Hikes*

MICHELLE KELLY-LOUW**

University of South Africa

1 Introduction

Various interest rate hikes from 2006 to 2008 have had a negative f‌inancial

effect, particularly on low-income homeowners. These and the worldwide

f‌inancial crisis have led to an increase in levels of consumer debt, and many

consumers have since lost their mortgaged homes, while others are still

f‌ighting to keep them. Although the National Credit Act (‘the Act’)

1

was

implemented in June 2006 to protect consumers, it did little to curb the

detrimental effect of the rising interest rates. Under the Act, a credit provider

may conclude a credit agreement with a consumer only after he has made a

proper f‌inancial assessment and concluded that the consumer will be able to

satisfy all his obligations under all his credit agreements.

2

This affordability

assessment will depend on the prevailing interest rates

3

at the time. Therefore,

the determination of loans allowed to be made to a consumer is based on

f‌inancial data available when that determination is made. However, there has

been a failure to consider what happens if the interest rate increases

signif‌icantly after the agreement is concluded, causing the consumer no

longer to be able to meet his obligations under his credit agreement. The

increase in interest rates may also cause the consumer to become

over-indebted, and he may even end up losing his mortgaged

4

home. If the

consumer is in the middle- or high-income group, he can cut down on his

* This article is based on similar papers delivered at the 12th International Conference on Consumer

Law held in Hyderabad, India on 26 February 2009; the International Meeting held in Chemnitz,

Germany, on 25 March 2009; and The Society of Law Teachers of Southern Africa’s 2009 Conference

held in Pietermaritzburg, on 1 July 2009 respectively.The f‌irst part of this article (pars 1-3) is also based

on M Kelly-Louw ‘The South African National CreditAct Fails to Protect Homeowners Against Various

Interest Rates Hikes’ (2009) 6 US-China LR 12, and parts thereof are republished here with the

permission of that journal’s editorial staff.

** BIuris LLB LLM LLD (Unisa) Dip Insolvency Law and Practice (UJ). Professor in the

Department of Mercantile Law, School of Law,University of South Africa.

1

Act 34 of 2005.

2

See ss 80-2 of the Act. In this article, the singular includes the plural and vice versa, and the

masculine includes the feminine and the neuter.

3

Interest rates are def‌ined by the Reserve Bank as follow (see the Reserve Bank Research

Department: Information Division ‘Interest Rates and How They Work’ 8th Fact Sheet, available

at http://www.reservebank.co.za/internet/Publication.nsf/LADV/D052839D3FB05983422573370045

AA21/$File/Fact+sheet+8.pdf, last visited on 2 November 2009 (hence ‘the Reserve Bank Fact Sheet’)

at 2):‘Interest rates are prices for loanable funds – prices of funds invested, lent out or borrowed for

various periods of time. The supplier or lender of funds normally wants to earn an income and the

user or borrower will generally be prepared to pay for the right to use the accumulated funds.’

4

Section 1 of the Act def‌ines ‘mortgage’ as a ‘pledge of immovable property that serves as security

for a mortgage agreement’; and ‘mortgage agreement’ as ‘a credit agreement that is secured by a pledge

of immovable property’.

27

(2010) 22 SA Merc LJ 27

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living costs, sell his home and buy a cheaper home in a different (poorer) area;

and still be able to afford to buy or own a home. But the low-income

consumer who just managed to meet the instalments on his housing loan

5

cannot lower his living standard any further and will possibly never be able to

buy or own his own home again. He has neither negligently nor intentionally

caused this situation, which seems to be unfair.

Because of the numerous interest rate hikes and the prevailing high interest

rates, many consumers (not only those in the low-income group) have lost

their mortgaged homes.

6

The Government provides free housing or housing

subsidies to certain members of the public – mainly the unemployed, those

who have never previously owned homes, and the poorest of the poor.

7

Generally, the rest of the low-income consumers whose homes have already

been foreclosed upon do not qualify for this assistance and, in the end, it is

this group that is left homeless. The Act has failed to cover cases such as

these. So there is no consumer protection available for the low-income group

who become over-indebted because of the constant rising interest rates on

their mortgage loans.

I will examine whether the South African Government has a responsibility

to protect low-income consumers against interest rate increases that often

cause them to lose their mortgaged homes. I will also investigate whether

there is any protection for a consumer in these circumstances that will allow

these consumers to keep their mortgaged homes. If I f‌ind that there is no such

protection, I will also argue whether, as a matter of public policy, there should

be.

2 Reckless Lending and Over-Indebtedness

It has been said that over-indebtedness results from reckless lending and

borrowing,

8

low levels of awareness, and a lack of enforcement; and that it

occurs when a borrower can no longer service all his debts or where the level

of debt servicing is depleting the household income and consumption.

9

In my

5

The Home Loan and Mortgage Disclosure Act 63 of 2000 def‌ines a ‘home loan’ as ‘a loan or

advance by a f‌inancial institution to a person for purposes of constructing, purchasing, renovating or

improving in any way such person’s home, with the security of a registered mortgage bond or any other

form of accepted security’ (see s 1).

6

See also Letitia Watson ‘Rentekoers Groot Kopseer vir Kliënte van Mikroleners’ Rapport

Newspaper (Sake-Rapport) (25 May 2008) 5 at 5; Anon ‘Interest Rates Down 100bps’News24.com (10

December 2008), available at http://www.news24.com; Alliance Group ‘Recent Interest Rate HikeWill

Increase Bank Foreclosures’ eProp Commercial Property News (12 October 2007), available at

http://www.eprop.co.za; Seeraj Mohamed ‘High Interest Rates and the Carry Trade’(28 August 2008),

available at http://www.polity.org.za; and Stuart Theobald ‘When Banks Struggle, Expect More Fees’

Sunday Time Newspaper (Business Times)(26 April 2009) 4 (all sites last visited on 2 November 2009).

7

See http://www.housing.gov.za(last visited on 2 November 2009). See also par 5 below.

8

The view has been expressed that the dominant cause of the current worldwide f‌inancial crisis was

excessive borrowing (see Anon ‘It’sTime to Sit Tight, be Conservative and Patient’ Enrich (Newsletter

for Transnet Retirement Fund Members) (April 2009) at 1).

9

See the Department of Trade and Industry Consumer Credit Law Reform: Policy Framework for

Consumer Credit (August 2004) at 3; and M Kelly-Louw ‘The Prevention and Alleviation of Consumer

Over-indebtedness’ (2008) 20 SA MercLJ 200 at 218.

(2010) 22 SA Merc LJ28

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