More than a third of South Africa’s economically active population earns between R1 000 to R5 000 a month, a category that generally sitsEuncomfortably above the basic housing subsidy level, but below theEusual financial criteria needed to qualify for a conventional housingEloan from a retail bank. That’s why changes to the Pension Funds Act,Eallowing trustees to grant members access to accumulated benefits forEhousing, were an innovative attempt to try and help solve one of theEcountry’s biggest problems.
But fund-backed lending is no panacea to the housing crises and needs to be used with care by members and closely monitored by the pension or provident fund trustees. The Financial Services Board recognised the dangers in 1997 and issued a circular warning funds against abusing the housing loan concessions in the Act.
The riskiest route is those funds that grant members a loan directly from the pool of benefits. This is treated as an investment for the fund, and in South Africa’s relatively low inflation environment will offer an acceptable return – as long as the member doesn’t default.
Deon Smith, business development executive for Old Mutual Employee Benefits, warns that where funds grant loans the administration costs can be high, which may lead to cross-subsidisation of this increased cost between those members that take loans and those who choose not to.
“There is also a high business risk for the fund since the potential for errors, omissions and fraud increases, and few administrators and administration systems can effectively manage this facility. This option can also reduce the fund’s investment return if the interest rate charged is less than what the fund earns on the balance of its assets,” Smith says.
The other, far more sensible option is for the fund to furnish a guarantee for a loan provided to the member by a third party. Monthly repayments are deducted from the fund member’s salary by the employer, and, should the member leave the fund or default on payment, the fund will settle the loan and recoup any outstanding amounts from the member’s benefits.
This system appears to work reasonably well, though not too many fund members appear to have used the facility, either because of various restrictions on the fund itself or, more typically, because of the lack of housing in this range. Typically, a person earning between R1 000 to R5 000 a month can afford a house in the R20 000 to R50 000 bracket.
So employers and employees alike reacted enthusiastically to the full-page advertisement that appeared in the national daily press last week promoting Makhulong Home Loans, a product marketed by Gateway Home Loans.
Accredited lenders for the Gateway scheme, solid banks like African Bank, Peoples Bank and Standard Bank, say they have been inundated with calls about the home loan product. But this is clearly causing some frustration, for both the banks and employers.
The problem is that anyone reading the advertisement will not unreasonably get the impression that funds and employees that qualify will be able to buy or build a house where they want to, within the financial restraints of a price range between R20 000 to R50 000.
Not so. What the advertisement, obviously aimed at concerned employers, does not say is that the home loan product is only available for houses from accredited developers and projects.
Surprisingly, no phone number is provided for Gateway in the advertisement, though it does give the company’s fax number, e-mail address and website. A visit to the site reveals that there are only seven accredited projects – three in Gauteng, three in KwaZulu-Natal and one in Mpumalanga.
None of the housing projects is in a central area, but instead all are near fairly small towns. And a quick calculation shows that a total of 9 201 houses are available or being built on all seven projects, an amount that will hardly make a dent in the pent-up demand for affordable housing.
Nobody wants to be cynical about what looks like a genuine attempt to address the sensitive housing problem. But there were probably a lot of disappointed employers last week who investigated Makhulong and discovered it provided no answers for their employees’ housing needs.
David Porteous, managing director of Gateway, said in earlier marketing material that through the process of securitisation – loans are packaged together and sold into the capital market, with the Home Loan Guarantee Company picking up the risk on the portion of the loan not covered by a fund – the company can secure the best possible rates for borrowers.
One can accept an element of pricing for risk in this market, but interest on the current tranche of loans is a fairly demanding 21% if measured against the prime rate of 18% and the expectation that rates will be cut soon.
The 21% is a fixed rate, so while high in the current interest rate climate it does offer stability to the borrower. However, one project manager in Durban points out that administration costs, and in some cases the requirement of a life insurance policy for the borrower, can push the rate as high as 25%.
There are certainly some attractive features to the Gateway scheme. For instance, money is only paid to a conveyancer on transfer or verification of ownership of the property, and the company also arranges counselling on the obligations of home ownership.
But there is also one threat underlying the whole concept of fund- guaranteed housing finance. If the member is forced to default, say through retrenchment, they could stand to lose not only their home, but their retirement fund benefits as well.