Innovative home loans the way to house the people

The government-owned National Housing Finance Corporation (NHFC) and financial services giant Old Mutual demonstrated last week how capital can be unlocked through public-private partnerships.

Their partnership squashes the myth that investors cannot generate a good buck by investing in causes that transform social engineering that was designed to benefit a few.

Old Mutual and the NHFC own an innovative home loan company known as Housing Investment Partners. The NHFC owns 33% and Old Mutual Capital Holdings 67%.

The offering shows up the banking sector’s inability to innovate in the home loan space, helping a certain group of people acquire houses without expensive unsecured loans.

Basically, Housing Investment Partners has raised R1.3bn to fund what is called “gap” housing. About R650m of this comes from Futuregrowth, an asset management company linked to Old Mutual; the NHFC provided R270m and Old Mutual Capital Holdings has put in R430m.

The gap market is the group of people that earns too much to qualify for free government housing but cannot qualify for mortgages from the banks. The Housing Investment Partners’ target market is low-to middle-income earners who have gross monthly salaries of between R3,500 and R30,000 and can access finance for houses in the R200,000 to R650,000 price range. The estimated backlog in the gap market is 850,000 housing units. So far, Housing Investment Partners has paid out R480m of the R1.3bn. About R900m has been committed for housing that is still under development. The expectation is that by the middle of next year, the entire R1.3bn would have been lent.

So what makes it innovative?

Housing Investment Partners offers a home loan that allows the customer to pay the same instalment if interest rates go up. Instalments rise only if the borrower’s salary increases.

This is what I call innovation because aggressive interest rate rises often lead to people losing their properties as they cannot keep up with monthly repayments. I do not recall banks doing this to help vulnerable people keep their houses.

Housing Investment Partners offers an interest rate of prime (9.25%) plus 4.5%, including credit life cover in case the customer dies.

I must say the lending rate is slightly above what traditional banks offer, due to the cost of funding. The guys at Housing Investment Partners say their cost of funding was influenced by the fact that the company was a startup with no track record. There is room for the cost of lending to the end user to go down in the future.

It can’t be correct that the poorest pay more in instalments while the middle and upper classes are charged less. Many of those in the middle class often pay the prime rate of interest, and some are likely to pay less.

Having said that, the offering by Old Mutual and NHFC is better than nothing. It is also far better than the 20%-plus interest rates people have to pay for unsecured loans in order to build houses.

Again, if the state and Old Mutual can come up with such an initiative, what stops the banks from emulating them? In this instance, the banks have been scooped by the NHFC and Old Mutual. All they need to do is emulate the model and try to offer reasonable credit for the gap market without asking customers to resort to expensive unsecured loans.

People often say this is a risky market and that savers’ money cannot be risked in such initiatives. That is nonsense. Futuregrowth takes in savers’ money and still generates returns.

As an example, the Futuregrowth Community Property Fund (CPF) has assets worth R3.3bn and focuses on emerging market retail property growth in underserviced rural communities and high-density townships. More than 30 properties have been funded to date and the CPF portfolio includes 24 centres in seven provinces. In Futuregrowth’s words: “The fund appeals to investors’ social concerns while at the same time providing solid investment returns — benchmarked at (consumer inflation) plus 4% before taxes and fees and with income reinvested over a rolling three-year period.”

This is what SA needs: more initiatives aimed at improving the way society has been engineered. All it takes is innovation.

Written by Phakamisa Ndzamela for BusinessDayLive.co.za