Using credit metrics to assess risk is important for agents and property, as many tenants are exiting the rental market.
PayProp reveals that over half of the participants cited finding good tenants as their biggest challenge in the current market.
Johette Smuts, PayProp head of data analytics, says they analysed credit checks on prospective tenants done through PayProp in Q1 2021.
“Minimum-risk tenants represented almost 40% of the checks done through PayProp in Q1 2021.”
More than 60% of tenants fall into the combined minimum- and low-risk categories, whereas a quarter of tenants were labelled as high risk.
“While this seems counterintuitive, it could be that high-risk tenants fall out of the vetting process even before a credit check is done.”
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| Credit metric | Minimum-risk | Low-risk | Medium-risk | High-risk |
| % of tenants | 38.9% | 22.4% | 14.6% | 24.1% |
| Net monthly income | R41 956 | R34 034 | R30 720 | R26 424 |
| CPA accounts | 8.73 | 8.68 | 7.20 | 6.37 |
| NLR accounts | 0.48 | 1.57 | 2.28 | 4.09 |
| Major delinquency | 0.8% | 14.5% | 25.8% | 41.2% |
| Debt-to-income ratio | 35.3% | 39.1% | 45.2% | 47.4% |
| Credit score | 690 | 644 | 619 | 592 |
Consider these 5 credit metrics when assessing tenant risk:
1. Income
Minimum-risk tenants tend to have higher incomes than those in other categories. In Q1 2021, the average monthly net income was nearly R42 000, almost R8 000 higher than low-risk tenants, and +R15 000 higher than high-risk tenants.
2. CPA and NLR accounts
Tenants across all risk categories have between 9 and 11 Credit Provider Accounts (CPA)and National Loan Register (NLR) accounts, respectively. CPA accounts are regarded as ‘good’ debt and NLR accounts is viewed as ‘bad’ debt on credit checks.
Smuts says CPA accounts include insurance, mobile phone contracts, retail stores and vehicle finance. NLR accounts comprise short-term loans from micro-lenders, usually with very high interest rates.
“High bad-debt accounts can indicate that a would-be tenant needed additional funds to make it through the month. They may also not have qualified for credit from other providers,” according to Smuts.
3. Major delinquencies
High-risk tenants recorded 41% major delinquencies compared to 25% of medium-risk tenants. A major delinquency can consist of judgements, notices and adverse accounts, for example. Fewer than 1% of minimum-risk tenants had a major delinquency against their name in the first quarter of 2021.
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4. Debt
Riskier tenants spend a higher percentage of their monthly income on debt repayments each month. In Q1, debt-to-income ratio averaged 47% with these tenants spending just over R12 500 a month on debt and other financial obligations.
5. Credit score
Minimum-risk tenants have higher (better) average scores than higher-risk tenants, with almost 100 points difference (690 vs 592).
Smuts adds: “When vetting tenants, it is important to consider the credit score and other factors, as well. We recommend looking at bank statements and salary slips where possible, and contacting references before making a final decision.”
Read also: North West records highest rental growth of 3.7%
Edited by Gudrun Kaiser
