Buying a home is the largest outlay most households will ever make, and few will ever be in a position to make such a purchase without a mortgage. But a new project in Bredasdorp, Western Cape, bills itself as a ‘deferred ownership’ scheme, and is targeted at those earning between R3,501 and R22,000 a month. The programme is a partnership between the municipality, the provincial Human Settlements department, and an implementing institution which undertakes to construct the actual units and bring them to market. The advantage is that it creates a pathway to ownership for those who, owing to credit impairments, would ordinarily not be able to secure a mortgage. Read more by Terrence Corrigan below on how the scheme aims to help the “missing middle” of those who live between destitution and basic financial comfort, first published on the Daily Friend. – Sandra Laurence
Putting home ownership on a sustainable footing
By Terrence Corrigan
Owning one’s home is an aspiration for millions of South Africans. It speaks not only to the holding of an asset, but – against the background of the systematic deprivation of property rights – also to an affirmation of citizenship and one’s place in a community.
Yet post-1994 housing policy has been marked by an ambivalence towards ownership: official priorities have been to provide shelter rather than property. And even where the extension of ownership has been accepted, it has run into the stiff practical difficulty of enabling people to acquire property.
Buying a home is the largest outlay most households will ever make, and vanishingly few will ever be in a position to make such a purchase out of pocket. This is particularly the case if the intention is to buy in the formal market, and receive that grail of legal recognition, the title deed.
Like so much else involved in meeting South Africa’s challenges, it needs innovative, out-of-the-box thinking. In this vein, an initiative being piloted in Bredasdorp in the Western Cape may hold out a possible solution.
Housing challenges are nuanced, but an enduring and intractable problem has been expanding opportunities not for the desperately poor, but for those who sit in the uncomfortable space between destitution and basic financial comfort that would enable a household to make its own way. A ‘missing middle’ of sorts.
Gavin Wiseman, director of Affordable Housing at the Western Cape Department of Human Settlements, adds that this is complicated by the fact that many in this bracket have impaired credit records, and commitments to informal lenders that make them unable to obtain financing in the formal credit market or unable properly to service a loan if they do.
Renting accommodation becomes the only option, which is both precarious and does not build equity for the household. The Bredasdorp project bills itself as a ‘deferred ownership’ scheme, and is targeted at this group, specifically those earning between R3,501 and R22, 000 a month.
Eligibility
Although this group has long been eligible for a subsidy through the Finance Linked Individual Subsidy Programme (FLISP), one of its key limitations was that it required the beneficiary to qualify for a mortgage from a financial institution. Changes to the relevant legislation have expanded the programme’s eligibility; these include so-called ‘rent to own’ arrangements, and this is what the Bredasdorp scheme is about.
In broad brushstrokes, the programme is a partnership between the municipality, the provincial Department of Human Settlements, and an implementing institution. In Bredasdorp, ASLA Construction has been appointed the implementing agency, and it has contracted My Budget Fitness (a financial consultancy) to manage a key part of the rollout.
The implementing agency undertakes to construct the actual units and bring them to market. In Bredasdorp, ASLA has opted to sell some outright, with the rest being offered through the deferred ownership scheme, initially as rental units.
Enlisting the potential of ICT, prospective buyers may visit a free-to-use app – Flisp.4me.Tech – to evaluate their financial fitness, monthly expenses and so on. Those whose circumstances make them eligible to proceed can be assisted by the implementing agency to apply for the subsidy and mortgage from a financial institution.
The real advantage of this programme is that it creates a pathway to ownership for those who owing to credit impairments would ordinarily not be able to secure a mortgage. If a person is ineligible, remedial action can be taken. Central to this is one-on-one counselling and monitoring with a financial coach.
For those with significant problems, this would be a long-term process of ‘budget repair’. For those with less debilitating issues – minor credit judgements, for example – it’s anticipated that their affairs can be brought into order over a period of between six months and two years. This screening and participant support work is performed by My Budget Fitness.
Deposit pool
The basic principle is that participants in the programme will rent their units for a period (again between six months and two years), with half of their monthly rentals being retained in an interest-bearing account to create a deposit pool. An option to buy is extended to participants in the programme who have regained their financial stability, with the accumulated deposit being accessed as an initial payment. This can be paired with FLISP financing.
Since the rental payments are priced so as to be comparable to a bond obligation, the rental period will also give the prospective buyers a clear experience of meeting those obligations.
What would speak to the prospects for this programme’s success? In large part, it’s because it recognises and responds to the realities of South African society.
Gavin Wiseman argues that what is new in the programme is the level of consumer education it offers. There is a great deal of emphasis on restoring participants to financial health, ensuring that they are able to handle the monthly repayments and therefore successfully to take on the responsibility of a bond. This, he says, makes it unique.
Daniel Pienaar, deputy director of Gap Housing at the Western Cape Department of Human Settlements, notes that the roll-out of the housing – from the financing through to provision and then to structured repayment – addresses a central reality for people in the province: ‘The affordability aspect is key here. Even if people qualify for a bond outright, finding housing stock even in small towns in the Western Cape priced between R350k and R450k is almost impossible.’
For Meyer de Waal, director of My Budget Fitness, it is a programme that reflects ‘the face of South Africa’. This is that many lower income households are overcommitted financially in ways that are not always properly recognised: a seemingly healthy payslip may conceal a multiplicity of challenges. There is, he says, a common (and understandable) impulse on the part of potential buyers to overstate their financial circumstances when seeking housing finance. ‘Many first-time buyers are overindebted and do not understand the process of how to go about buying their own homes,’ he notes.
Financial fitness
So, he believes that a central part of its success will lie in the sophisticated IT platform that will screen participants for their financial fitness, and the financial coaching that follows. He estimates that the IT system will make it possible to read prospective participants with an 80% accuracy, at a minimum, and those passing through the programme will be suitably capacitated to handle the financial commitments that servicing a housing loan will entail.
The interest in the programme from prospective home-buyers is, he says, ‘fantastic’.
Particularly intriguing is that the deferred ownership model has been noticed elsewhere. The African Union for Housing Finance – a continental body representing stakeholders in the housing industry – has expressed interest in it, as has the International Finance Corporation and Namibia’s Government Institutions Pension Fund.
The project is in the pilot stage, and as Gavin Wiseman says, the ‘proof of the pudding will be in the eating’ over the next few years. Right now, though, it seems to offer some interesting solutions not only to home ownership, but to inclusion in the financial systems that make it possible.
- Providing wash facilities (or a lekker shower) for Cape Town’s homeless
- Give them property rights – an idealistic duel
- Property hijacking – and what to do about it
