New home loan arrangement opens the market to more affordable housing buyers
The new organization, in which Old Mutual and the National Housing Finance Corporation (“NHFC”) are the shareholders, has stated publicly that 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 especially 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.
Below this level, he said, 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 there are currently very limited resale opportunities.
HiP, said van Alphen, 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 some 200,000 creditworthy potential homebuyers (who might require approximately R75 billion in loans). However, currently only 25,000 newly built affordable housing units come onto this market per annum.
In what way, therefore, does HiP see itself as being able to offer finance in a more innovative and accessible way than the traditional banks?
“The traditional banks’ 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, said van Alphen, 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 actual salary increases. 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, thus achieved, 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 HiP 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 therefore always predictable and will increase only when the borrower’s salary is reviewed annually and not when the prime interest rate moves.
HiP, said van Alphen, has shown that the HiP home loan is repaid on the assumption that the borrower’s salary will increase annually by the inflation rate plus 1% 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 for the borrower, the initial deposit required will be limited to 2% 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 (capitalized 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 with HiP in preparing and submitting the relevant mortgage bond applications.
“It has to be said,” said van Alphen, “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 home owner’s in gaining access to home ownership”.