New income-linked loan arrangement

Housing Investment Partners (HiP) is a welcome addition to the South African residential property sector, says Mike van Alphen, national manager of the Rawson Property Group’s bond origination division, Rawson Finance.

‘Old Mutual and the National Housing Finance Corporation (NHFC) are the shareholders in the new organisation, which has the goal of helping potential first-time home buyers to acquire affordable homes earlier (up to five years) than at present,’ he says.

According to Van Alphen, the home loan devised by HiP will be especially suited to lower-middle income earners with monthly salaries of between R3 500 and R20 000 and house prices ranging f rom R200 000 to R550 000.

‘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, as HiP has pointed out, the pace of housing delivery is still very slow and resale opportunities are very limited.

‘HiP will particularly target employers who are prepared to offer their employees assistance in obtaining homes. 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 t here are about 200 000 creditworthy potential home buyers in the gap housing market targeted, who might require R75 billion in loans. However, only 25 000 newly built affordable housing units come on to this market each year.

‘The traditional banks’ ability to service the affordable housing market has been limited by many potential buyers earning too little to qualify for home loans and the fact that future (increased) earnings are never taken into account in awarding l oans. Also, t he banks have to make allowances for unpredictable interest rate increases that might put borrowers’ repayments in jeopardy,’ says Van Alphen.

‘To achieve its goals, HiP has introduced income-linked home loans that provide for loan repayments to escalate annually as they are aligned to borrowers’ actual salary increases. Under this arrangement, home loan payments in the initial stages of the loan term are lower, so more borrowers can afford them. Repayments increase in the later stages when borrowers’ incomes are higher.

‘The enhanced model facilitates earlier access to home ownership and keeps repayments affordable throughout the 20-year loan terms because the predictable loan repayments are aligned to borrowers’ salary reviews. The same applies to monthly pension payment deductions.

‘Borrowers’ uncertainties are reduced by HiP monthly home loan repayments being fixed for 12 months at a level aligned with actual salaries for that period. Loan repayments are always predictable and will increase only when borrowers’ salaries are reviewed annually and aren’t linked to the prime interest rate.’

Van Alphen says HiP has shown that the home loans are repaid on the assumption that the borrowers’ salaries will increase annually by the inflation rate plus 1 percent with the loan settled after 240 months.

‘To make matters even easier for borrowers, the initial deposit required will be limited to 2 percent of the purchase price, assuming 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 will be paid monthly over and above the bond repayment.

‘HiP has assured those interested in participating that the usual prudent credit and employment checks will be carried out and that extensive borrower education will be provided before loans are advanced,’ says Van Alphen.

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

‘A product such as this is exactly what South Africa’s affordable residential sector needs at the moment – and we hope other lenders will follow HiP’s example in helping firsttime buyers gain access to home ownership.’

Written for IOLProperty.co.za