Product innovation?
There have been a few new mortgage products launched over the past couple weeks. In the context of rapidly rising consumer debt and rapidly falling rates of house price growth, this could be construed as an effort by the financial sector to retain their customers and stretch the boom period for a little longer… it certainly is a response to an evolving market in which affordability is becoming an issue even for higher income earners.
Interest-only mortgage
At the beginning of the month, SA Home Loans launched an “interest-only mortgage”, the first ever in South Africa. Offered over the full 20-year term, the loan gives borrowers the option of paying only the interest on their home loan for up to 20 years. SA Home Loans says that the product is “aimed at new home buyers struggling with a cash flow squeeze, as well as individuals who own businesses or earn commission and who have predictable annual earnings but uneven monthly income.” A mortgage of R1 million (only just above average these days and at today’s exchange rate of $1 = R7.71, about $130 000), would ‘save’ the purchaser R1240 a month – that is, until they have to pay it back eventually, either through the sale of the property (in which case they would lose potential equity gains) or through some other form of capital payment.
Essentially the product is an indication of SA Home Loans’ confidence in the property market in South Africa. They wouldn’t offer it if they suspected house prices were to suddenly drop. It also is a response to the rising interest rate climate – and our exchange rate which as risen from R6 to the dollar to now almost R8 to the dollar. Every day expenses are becoming more expensive, and so this product seeks to assist borrowers manage the crunch as the economy stabilises.
The product has its critics. ABSA Home Loans Managing Executive Gavin Opperman says “dig deeper and it becomes obvious there are a number of inherent risks especially in the current volatile environment and the slowing property market”. SA Home Loans responds with an argument that suggests that the product is targeted at those who are highly financially literate, suggesting that the R1024 saving on a R1 million mortgage, for instance, could be better invested in equities in the short term as that market outperforms the property market. Very de Soto-esque, it will have to be carefully managed. And this is the comment from other banks who suggest the product could be useful to ‘mature’ consumers but could be a ‘debt-trap’ for ordinary consumer’.
Reverse-equity mortgage
A variation on the affordability theme is a reverse-equity mortgage which allows borrowers to draw on the equity value of their loan as a way of supplementing their incomes. Just launched by two service providers, Nedbank (one of the big four SA banks) and Senior’s Finance (a company established by Alexander Forbes and Sentinel, a market leader in the provision of home equity release products in New Zealand, Australia and elsewhere), the product is targeted at senior citizens seeking to enhance their monthly budgets with the value of their homes.
Nedbank’s new “Home Income Plan” is available to people aged between 65-85. The loan size can be anywhere between 10-45% of the property value, depending on the age of the borrower and other factors including property market dynamics, but cannot be less than R250 000. The property must be the borrower’s primary residence, and must be mortgage free. The current interest rate is prime plus 1.95%.
Seniors’ Finance Home Equity Lifetime Provider is available to anyone over 65 who own mortgage-free homes worth more than R500 000. The minimum loan size is R50 000, also at a rate of 1.95% plus prime.
Interestingly, the idea was raised in the Mail & Guardian in May, where UK, French and American examples are cited. In that article, the failure of SA Banks to innovate was cited. Meanwhile, it appears that Virgin Money is intending to enter the home loan market, also with a reverse equity product. Virgin’s Richard Branson promises that “within two and a half years Virgin Money will have a greater range of products at highly competitive prices, than any other banking institute in South Africa.”
The introduction of new products seeking to ameliorate loan affordability is certainly important. However, I can’t help feeling disappointed that the major fanfare in innovation has been around a market largely served – and that its about enhancing access to cash flow rather than access to housing. In sharing this dismay the other day, I was scolded by a banking colleague – he suggested that innovation where the risks are understood and easily managed is a necessary first step. Once systems are in place, we can expect innovation to trickle down, as it were, to those with greater affordability challenges. Let’s hope so - there are a lot of people in South Africa who cannot afford a home – but who might if they had access to the right product.
