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Affordable housing finance – the safe bet for lower defaults

FNB defaults in lower-income housing repayments at all time low.

PRETORIA: Developers may start building lower cost housing units now that they see the government’s Finance-Linked Individual Subsidy Programme (FLISP) is working. FLISP is an instrument to assist qualifying households by providing a once-off down payment to those who have secured mortgage finance to acquire a residential property for the first time. Depending on the income level a qualifying beneficiary will qualify for a subsidy of between R10 000 to R87 000 for a property to be financed to the tune of and not exceeding R300 000 purchase price.

According to Marius Marais, CEO of FNB Housing Finance, there are very few housing units available for under R300 000, all inclusive of cost. He said now that developers have seen that the money is available through FLISP, they might deliver some of these units quickly by adapting the specifications of their existing pipeline of planned developments.

In the different income segments, those households earning less than R3 500 per month is covered by the social net of government, offering RDP houses to these households. Marais calls this the first layer. The second layer is where affordable housing and the finance thereof comes into play, where households earn an annual income of up to R307 600 (about R25 000 per month) – the gap market as it is below the level where banks traditionally offered mortgage finance. But inside that second layer, there is still a segment that is struggling to get access to housing finance and is not covered by either the government’s social programme or players in affordable housing finance. This is where household income is up to about R6 000 per month. Too much to qualify for an RDP house, too little to access finance – the gap in the gap market.

If something can be done to provide these households with housing, it would have a tremendous effect on the economy, says Marais. “It would have huge implications, especially around job creation.”

FNB has been financing in the affordable market for 10 years and is close to surpassing the 100 000 units financed threshold. It currently has market share of between 20% and 25% and offers 100% loans to qualifying customers. The loan book of the business is about R12bn and contrary to what some may think – the default rate is much lower than for the traditional mortgage segment where household income is higher than R300 000 per annum. Marais says at the top end of the cycle, when defaults were at their highest, defaults in the affordable housing segment of the business was half of the default level at the upper end.

For every 45m2 unit that is built there is a direct economic job creation impact of 200 workdays, Marais says. On top of that there is also indirect job creation through the suppliers of the materials etc. “The developers are also trying to use more and more local labour,” he says, adding that skills transfer is encouraged. In one of the flagship developments where FNB has been involved, Cosmo City, the increase in value since the first houses were sold is about R100 000 on average per unit. “Those families accumulated that in personal wealth created,” he says. Although FNB only has ten years history to extrapolate data from, Marais says it the affordable housing market also has a lower turnover. “These households tend to do a lot of improvement and extensions to their properties,” he says. Where the average period before a house is sold in the higher income bracket is around four years, for the affordable housing market it is between eight and ten years. And, says Marais, the default rate is currently at an all-time low.

Any pressure coming through from the surge in unsecured lending?

“Not that we can see yet, but we are watching the unsecured situation carefully,” Marais says. “Cash-wise it will compete with our instalments.” He adds that there will always be a debate about which payments should receive priority in the payment system. A lot of FNB’s affordable housing clients have the instalment deducted from payroll. Any garnishees against clients will thus go off first before their home instalment. “When there is a debt review the theory is also to pay the more expensive debts, in terms of interest charged first,” Marais says. This comes at the expense of the “cheaper” home loan, but he believes the asset should be protected first.

The growth in the loan book has been approximately 20% or more every year since FNB started offering finance, but Marais hopes to reach the second 100 000 units in half the time it took to reach the first 100 000. 

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