Home loans for affordable housing

Mike van Alphen, the National Manager of Rawson Finance, has welcomed the advent of Housing Investment Partners (HiP) to the South African residential sector.
The ‘traditional banks’ ability to service the affordable housing market has been limited by the fact that many potential buyers earn too little to qualify for a home loan.
Old Mutual and the National Housing Finance Corporation (NHFC) are shareholders of the organisation, which has stated its goal is to help potential first-time home buyers enter the affordable housing sector earlier than is currently the case (‘earlier’ is defined as anything up to five years).

According to van Alphen, the home loan devised by HiP will be suited to the lower-middle income housing market where a monthly salary of between R3 500 and R20 000 prevails and where house prices range from R200 000 to R550 000.

He says that below this level, first-time home buyers qualify for fully subsidised homes and this eliminates the need for financial assistance. However, in this subsidised market, the pace of housing delivery is still slow and there are currently limited resale opportunities.

Van Alphen says HiP will target, in particular, employers who are prepared to offer their employees assistance in obtaining a home. The public and mining sectors will be high on the target list, as well as accredited private sector organisations, especially those listed on the JSE Securities Exchange.

HiP estimates that in the ‘gap’ housing market targeted, there are 200 000 creditworthy potential home buyers (who might require approximately R75 billion in loans). However, currently only 25 000 newly built affordable housing units come onto this market per annum.
The home loan devised by HiP will be suited to the lower-middle income housing market where a monthly salary of between R3 500 and R20 000 prevails and where house prices range from R200 000 to R550 000.
HiP sees itself as being able to offer finance in a more innovative and accessible way than the traditional banks because the bank’s ability to service the affordable housing market has been limited by:

Many potential buyers earning too little to qualify for a home loan;
The fact that future (increased) earnings are never taken into account in awarding a loan; and
The banks having to make allowances for unpredictable interest rate increases that might put the borrower’s repayment in jeopardy.
To achieve their goals, HiP has introduced an income (salary) linked home loan which provides for loan repayments that escalate annually as they are aligned to the borrower’s salary increases, says van Alphen. Under this arrangement, home loan payments in the initial stages of the loan term are lower, which enhances borrower affordability and they are higher in the later stages when the borrower’s salary can afford them. The enhanced affordability facilitates earlier access to home ownership and keeps the repayments affordable throughout the loan term of twenty years because the predictable loan repayments are fully aligned to the borrower’s salary reviews (the same happens with monthly pension payment deductions).

The borrower’s uncertainties are reduced by the monthly home loan repayments being fixed for twelve months at a level aligned with the borrower’s actual salary for that period. The loan repayment is always predictable and will increase only when the borrower’s salary is reviewed annually and not when the prime interest rate moves.

Van Alphen says HiP has shown that the home loan is repaid on the assumption that the borrower’s salary will increase annually by the inflation rate plus 1 percent with the loan settled after 240 months (20 years). Should the borrower’s salary increase above this level, the loan is repaid after a shorter term. Should the salary move below this, there would be a residual amount owing on the loan which would require refinancing at the end of the loan term.

To make matters even easier, the initial deposit required will be limited to 2 percent of the purchase price (if no employer or government subsidy exists in which case it is waived), the initial fee will be only R5 700 including VAT (capitalised to the loan where this is required) and an administration fee of R57 including VAT per month will be paid over and above the monthly repayment.

HiP has assured those interested in participating that the usual, prudent credit, affordability and employment checks will be carried out and that extensive ‘borrower education’ will be provided before the loan is advanced.

Rawson Finance has been selected as one of the originators to work in preparing and submitting the relevant mortgage bond applications.

“It has to be said that a product such as this is exactly what South Africa’s affordable residential sector needs at the moment — and it is hoped that other lenders will follow HiP’s example in helping first-time homeowner’s in gaining access to homeownership,” says van Alphen.

Written for Property24.com