South Africa needs more home loan options to make home ownership more accessible.
“In response to the increasingly diverse financial backgrounds and capabilities of home buyers, we need a greater variety of home loan “packages” to suit different types of borrower,” says Shaun Rademeyer, CEO of BetterBond, SA’s biggest bond originator.
For most consumers, he notes, affordability is not really about the total price but about the “effective cost”, or size of the monthly repayment. “When it comes to vehicles, for example, they would rather finance over 54 or 60 months and keep the instalment down than pay over 36 months and cut the total cost of the item.
“And with the average length of stay in a home having dropped from 10 to 15 years to five or seven years at most, consumers are beginning to think this way about home loans too – and look for ways to get the most home possible for the lowest possible deposit and smallest possible monthly repayment.
“This is what they’re really shopping for, and at the very least suggests the need for more loans structured to be repaid over 25 to 30 years instead of the traditional 20 years.”
On the other hand, Rademeyer notes, homebuyers with no plans to move, who are perhaps nearing retirement age or living on a fixed income and want to know their exact monthly payments, would no doubt prefer loans at a fixed rate of interest for the long term.
“However, at the moment, borrowers can usually only fix rates for a year or two, and they have to pay a ‘penalty’ interest rate that is one to two percent above the standard home loan rate for seeking this kind of certainty.”
Then there are property investors who would probably be delighted with the financial flexibility—and added cash flow—that would come from a mortgage with an initial interest-only period, he says.
“Indeed, the more we explore this topic, the clearer it becomes that lenders who are hoping to keep and expand their home loan customer base really need to become more innovative and flexible with their product offerings – and to make better use of information provided by originators such as BetterBond to become more responsive to market demand.”
Rademeyer says local lenders could learn from banks in the UK and the US, which are used to really competing for home loan business and constantly coming up with new loan options designed to appeal to specific types or groups of borrowers and promoting them to the originators and loan brokers who are actually in touch with consumers.
“Even in Australia, there are more than 1000 home loan variants available at any one time, the idea being to make home ownership as accessible to as many people as possible. And it must be said that this type of flexibility in no way interferes with consumer protection as provided for in the National Credit Act and the Consumer Protection Act.
“In fact, the more legitimate loan options there are and the closer ties the lenders have with the originators who are effectively their marketers, the less likely borrowers are to get bitten by loan sharks.”