New product offers gap housing finance

A TOTAL of R1.35 billion has been secured for housing finance in the gap market through a public-private partnership between Old Mutual Capital Holdings, the National Housing Finance Corporation (NHFC) and Future Growth.

The gap market comprises prospective homeowners who earn too much to qualify for a housing subsidy or Reconstruction and Development Programme (RDP) house from the government, but earn insufficient to qualify for a conventional home loan.

Andrew Chimphondah, the chief executive of Housing Finance Partners (HiP), the public-private partnership, said yesterday that they had developed an innovative product to expedite home ownership in the affordable housing market.

Of this total amount, Future Growth has provided R650 million, Old Mutual Capital Holdings R430m and the NHFC R270m.

Chimphondah said this product was developed in 2009 but was officially launched, in terms of paying out loans, in January 2013 and R900m of the R1.35bn funding secured was already committed.

The product

Without any advertising, HiP had received 21 200 applications worth R2.4bn and its loan book was already worth R480m and had benefited 1 191 customers, he said.

Chimphondah said unlike a traditional mortgage bond that had a variable interest rate and the instalment rose or fell in line with interest rate fluctuations, HiP’s product had a fixed instalment for a year.

He said the instalment was linked to the customer’s salary and increased in tandem with their salary increases over the 20-year term of the loan.

He said the instalment would not comprise more than 24 percent of a customer’s gross salary and there was an assumption customers’ salaries would increase by the inflation rate plus 2 percent a year.

“Their commitment never exceeds that proportion of their gross salary. We don’t want to impact on the customer’s affordability so if their salary goes up, the instalment goes up by a small percentage,” he said.

Michael Goemans, a director of HiP and the finance head at Old Mutual’s Mass Foundation Business, said if interest rates had increased materially over the term of the loan and had not come down again, there might be a residual amount that would have to be paid at the end of the term.

But Goemans said it was not expected that a residual amount would be payable at the end of the loan term because South Africa had, for some time, been in a period of more stable interest rates.

He added that there was massive demand in the gap between the low-end RDP and subsidy houses and the house market served by the banks.

A lot of these customers were creditworthy but had been priced out of the market because of affordability, he said.

Affordability

Goemans said HiP’s product created some initial affordability but did not compromise on credit risk, stressing customers had to be creditworthy, formally employed and have stable earnings.

“The instalment is a stable percentage of their salary so it doesn’t become more or less affordable over time.”

He said the interest rate payable on the loan was the prime rate plus 4.5 percent, which included credit life cover. Six months cover is included in the credit life policy to allow customers who are retrenched to address their situation.

Goemans said the interest rate charged by HiP was in line with what would be charged by banks and less than half the cost of unsecured lending.

Chimphondah said there was demand for about 850 000 houses in the gap market, with a price of between R200 000 and R650 000.