Since the dawn of democracy and the introduction of the RDP housing programme in South Africa, the government has constructed upwards of three million housing units. In 2011, state-subsidised housing stock was estimated to make-up 24% of all residential deeds registered in the country.
In a report published by the Centre of Affordable Housing in Africa, 3, 8 million households or 28.8% of all occupied units earned a household income between R3, 500 and R10, 000 per month. This figure represents those who fall squarely in the housing ‘gap’, with many still waiting to enter the formal housing space.
For the three million more people who do not have access to formal housing, their salaries deny them the opportunity to qualify for an RDP house, and yet not enough to be approved for a 100% home loan.
Pension Backed Housing Loans (PBHL) is an alternative form of housing finance where the loan is secured by the member’s retirement fund savings instead of a mortgage bond. The Pension Funds Act then allows employees to use their retirement fund credits as security for mortgages on existing or new property, with the option to ‘self-build’ or improved existing dwellings.
PBHL is an interesting solution to address the housing shortfall as there are trillions of rands in pension funds which could be utilised as collateral, with only a fraction of PBHL (approximately R20bn) floating in the bond market.
In many cases however, employees apply and are approved for loans to be used for ‘self-built’ and renovations, often referred to as incremental housing. Sometimes money is misused or not used at all for its intended purposes which could lead to financial distress for the consumer. The days of bankroll big-ticket items under the guise of PBHL will be short-lived as more responsible financial institutions back the product and insure proper protocols to insure the proper use of funds.
The positive case for PBL is that if an employee has been working for a fifteen year span, he would have built up between R200, 000 and R300, 000, due to “compulsory savings” model of pension fund participation. The collateral is sacrosanct, meaning that under no circumstance should these savings be touched other than to use it for leveraging a bond on a fixed asset.
Collateral in such a situation is not helpful to the man who has reached retirement, having gone through three cycles of moving after having children and downsizing again. It is more useful at forty years, when you’ve built up R100,000 and want to add onto your existing home, or apply for a traditional home loan where you where you could use the PBHL proceeds as a deposit or cover closing costs that the traditional bank will not finance.
Instrumental to the Musa Group business model is their desired outcome to “Do Good and Do Well” in the communities in which they operate. This, coupled with the Department of Human Settlement’s premise on the constitutional mandate that “everyone has the right to have access to adequate housing”, saw to the beginnings of an impactful partnership between Musa and the Gauteng Partnership Fund; resulting in Musa being the first intermediary to receive funding for the provision of Pension Backed Home Loans (PBHL). Musa, in their continued effort to expand on their home loans division, will utilise the funded amount of R15, 000, 000 (fifteen million rands), towards transforming the lives of low to medium income earners. This model will, in addition, positively impact on various retailers, currently operating in partnership with the Group; providing beneficial housing solutions for employees within these businesses. In comparing an average micro funding loan to the funding model of PBHL, the variation in repayments for a R30, 000 home improvement loan is roughly R20, 000 in savings, for the borrower, over the life of the loan. Supporting the expansion of the use of PBHL as a funding tool will, thus, enable home ownership to become attainable to previously excluded individuals. Institutions such as GPF and Human Settlements, in providing funding to intermediaries like Musa Group, are vital to further establishing PBHL and providing an environment conducive to sustainability and long-term growth for the South African housing landscape.