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Futuregrowth Good News: home loans to low income buyers

South Africa is in urgent need of some inspiring good news and Futuregrowth Asset Managers are the team to help us out. Their impressive work in the debt and equity markets is well respected always making sure that there is a social upliftment or development angle to their much needed work. To this end they are the 52% funders to Housing Investment Partners (HiP) along with Old Mutual and the National Housing Finance Corporation. HiP provides income-linked home loans to low-income households who ordinarily would not meet the criteria laid out by our big four and beyond. This allows creditworthy individuals to access the housing market driving asset ownership and prosperity. This initiative not only houses families, but allows home owners to learn much needed skills around managing finances, maintaining their assets and potentially leaving a legacy for their families. – Candice Paine

Hi, this is Candice Paine for BizNews. I’m sitting with Paul Semple, who is a Portfolio Manager with Futuregrowth Asset Management. This special Podcast is brought to you by Futuregrowth. Today we’re talking about a very interesting deal that Futuregrowth has embarked on, where they are funding Housing Investment Partners to provide low-cost housing to people who, ordinarily would be excluded from that market. Paul, do you want to tell us a little bit more about the deal?

Yes, thanks Candice. Futuregrowth looked at this deal for a number of months, before we decided to invest. This is a really, new business. When I say ‘new’, it’s in its third year now. When we started looking at it, it was just about a year old and we immediately saw the potential for this business to grow and to fill a very real need in the market, and that is to address the affordability constraints. That the low to mid-income earner has when they are buying a house for the first time.

What would you include in that lower to mid-income range? What sort of household income are we looking at?

We’re specifically looking at an income of between R8 000 and R15 000.00 per month. The traditional banking market would really cut off their loan applications at around R12 000.00 per month.

So this can tend to be quite ‘high risk’ if that’s household income. What are the qualifying criteria for somebody who has that sort of household income, wanting to purchase a home through this scheme?

Yes, there’s a really, well structured, credit assessment process that housing investment partners follows. I think probably the first criteria, is the applicant must be fulltime employed, and they must have been employed for a period of time before their application is submitted.

The second criteria is the home loan repayment should not be more than 30% of their income. Now, the benefit of this type of loan is that, although it starts at 30% – the instalment starts at 30% of the monthly income – it increases annually. The instalment increases annually, in line with the salary increase that the borrower receives from his employer.

Okay, so that’s different to normal home loans, where it increases with the prime rate.

Absolutely, so it provides a lower starting or entry level for a first time buyer, in terms of being able to afford a home loan. And secondly, it gives the borrower the certainty that their instalments won’t fluctuate when the prime rate changes, so it gives them a long-term outlook on their affordability for that loan.

And what would be the term of one of these loans?

The term is exactly the same as the traditional mortgage of 20 years.

Okay.

The only difference, as I say, is that the instalment increases annually as opposed to being flat which would be the case in a traditional loan.

And would these be 100 percent loans?

Up to 98 percent would be financed with debt, Candice. The borrower would need to provide that two percent. The business is targeting a lot of mining companies, which provide subsidised packages to their employees, and provide that two percent also, of equity up front, as a kind of a grant to their employees.

And what are the sorts of house prices that we are looking at, for people that fall into this bracket?

The typical house range would be between R300 000.00 and R400 000.00 value.

And do we have enough of that housing available in the country?

No, that’s the biggest challenge in this market. First of all, there’s huge demand for housing. Number two, is that there is not enough housing stock coming into the market. Just a statistic is that there are over 200 thousand homebuyers out there, in this market, in this low to affordable income market, but there is only 25 thousand units being delivered per annum, and most of those units are unable to be financed by the traditional bank.

Okay, so this is really the gap that they are trying to fill. What is the relationship between the National Housing Finance Corp and Old Mutual in this deal?

They are both the shareholders of this business, and they established the business, it was their concept and their vision.

Paul, how much funding is there available for this scheme from Futuregrowth?

Futuregrowth has agreed to a R650m debt line to the business, and that comprises 52 percent of the total funding package for the business. The shareholders provide the other 48 percent of the funding.

Okay, so it’s quite large, and are the underlying participants, do they need to take out the normal, sort of home insurance, and life insurance, and those kinds of things as well?

Yes, that’s a critical part of the loan scheme. The home loan borrowers need to take that out. Old Mutual provides that. The borrowers are not forced to take an Old Mutual product, but that is offered to them as life cover and there’s also retrenchment cover available too.

And Futuregrowth has a strong development angle to the types of opportunities that they invest in, is it the same with this kind of deal?

Yes absolutely, this fits squarely into our developmental mandate and many of our funds have that aspect in their mandate investment requirements, so it’s great for that.

And do you see this promoting prosperity in the country?

Absolutely, we see home ownership as a significant driver of prosperity in this country, and it fulfils a very important role in addressing the socio-economic challenges that we have in South Africa.

And then just finally Paul, there’s obviously a value chain in providing the rollout of the homes that are needed within the South African context. Is that something that Futuregrowth looks at too?

Yes Candice, Futuregrowth is busy looking at a number of investments in actual housing development, so funding the actual developers of these houses, which is great because then we can see the full value chain, from the raw land, right through to the ultimate home that’s built and financed, through a business like Housing Investment Partners.

And you’d also have a very huge impact on this scheme working, if you’re involved across the value chain.

Absolutely. Yes, we believe that we’re providing money towards really high-impact, on the ground investment, which will make a difference in many peoples’ lives.

Paul, thank you for your time today. It’s really encouraging the work that Futuregrowth Asset Management is doing in the development and upliftment of the country, and more schemes like this I’m sure will go a long way to making our country a better place to be in.

Thank you Candice.

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