Give us cheaper access to credit

2016-02-08 12:17

Times are tough in SA and people need access to credit. The problem is that for the most vulnerable, interest rates and fees on microloans are very high, which leads to expensive instalments and high bad debt levels. Using a house as security can lead to much lower instalments, can save the borrower a great deal of money and can increase the comfort level of the lender. Many people own houses that are not properly registered, that do not have title deeds and therefore cannot be used as security. Many others do, but are underserviced by lenders. If we could increase the proportion of registered properties in SA (that can be used as security) and better service low-income home owners, it would increase the accessibility of credit at lower interest rates.

There are broadly two types of credit that people in SA have access to, namely secured credit (which includes bonds and vehicle finance) and unsecured credit (which includes microloans). The interest rate that institutions charge on unsecured credit is much higher than on secured credit, because defaults (bad loans) are typically higher (more people do not pay back unsecured loans than people who do not pay back their bonds) and in the case of an unsecured loan default, there is no property or goods to repossess, so the institutions do not recover any of the unpaid loan.

Interest rates on unsecured credit are currently above 27% per year for most unsecured lenders. Under the new Draft Regulations, which will likely come into play this year, the maximum allowable interest rate will be 26.5% (repo rate TIMES 1.7 PLUS 15%) for unsecured loans. For bonds (or home mortgages), the maximum interest rate under the Draft Regulations will be 18.75% (repo rate PLUS 12%), although most people are able to access much lower interest rates on their bonds (13% and below, which is less than half of what unsecured borrowers pay).

What this means is that the most vulnerable people in SA who are taking out loans are paying twice or more for the privilege than people who can offer security. The very high instalments that unsecured lenders have to pay, reduces the affordability of loans and increases default levels. You are more likely to run into financial difficulties if you have to pay twice as much back on your loan every month.

According to the National Credit Regulator (NCR), unsecured credit in SA as at September 2015 amounted to R162 billion (up 10% from the previous year). This was about 10% of the total consumer credit at that time. That is a lot of money owed by people. It also implies large repayments required. Based on the new Draft Regulations, this implies an annual interest bill of a staggering R43 billion. If these borrowers were able to provide security on their loans, in the form of a house, they could theoretically save a massive R21 billion in interest payments every year. Imagine the positive impact that this could have on their pockets and on the economy as a whole.

So why are so many people in SA unable to access secured credit? Is it because they do not own property? The answer is a definitive no. According to the NCR Consumer Credit Market Report for the Third Quarter of 2015, 75% of new mortgages (bond loans) that were issued were larger than R700000 in size and a massive 95% of mortgages were for sizes above R350000 and above. By number, only 25% of new mortgages granted in 2014 were for R350000 or less according to the Centre for Affordable Housing Finance in Africa 2015 Yearbook. Because almost no bank is offering 100% mortgages (you typically have to pay a large deposit), the R350000 mortgage mentioned above probably relates to a property worth R450000 or more.

According to the Centre for Affordable Housing Finance in Africa, only 3% of mortgages in number (during 2014) were granted to people earning less than R15000 per month, which is needed to finance a house valued at R370000. This means that the majority of people who own houses worth less than R370000 are not getting mortgages. The same report noted that over 40% of registered properties in SA are worth R300000 and below, which means that an even higher proportion of SA properties fall into the group above, those that are not receiving mortgages.

In addition to the 40% plus of registered home-owners who are not receiving mortgages there are a further 1.5 million (estimated) home owners who are not even registered as home owners. The Centre for Affordable Housing Finance in Africa estimates that “just over half of the 3 million subsidised houses delivered by the state since 1994 are formally registered in the deeds registry”. The rest of these houses are not registered. If we take both registered houses worth below R300000 and the unregistered houses, it implies that well over half of SA home owners have no access to mortgage finance.

What does this mean? It means that over half of South African home owners are not using their homes as security for the loans that they take out. It means that over half of South African home owners are paying interest rates that are twice as high as the interest rates they would have paid if they had been taking our mortgages, using their homes as security. It means that there is a huge untapped opportunity to provide South Africans with cheaper credit and potentially larger levels of credit.

What is the downside of using your home as security on a mortgage loan? We have discussed the upside of such an arrangement, but there is a downside. If you default on a mortgage loan, your home may be repossessed! The question is whether this is worth the risk? If your loan instalment is half of what it normally is (with your home as security), will it not be much more affordable and will you not be much less likely to default? If you know that your home is at risk, will you not be much more careful in the amount that you borrow and much more diligent in making sure you keep up your instalments?

So what can be done to tap into this huge opportunity of cheaper credit for the most vulnerable in our society? There are two things. Firstly, there must be an aggressive drive by Government to ensure that all properties are properly registered and that the owners have legitimate title deeds to their properties. Secondly, banks and other lenders must be encouraged and even subsidised (to some extent) to offer mortgages to the half of South African home owners who currently have no access.

There is no shortage of money in SA to fund the potential increase (or reclassification) of debt that these steps above would imply. According to the latest banking statistics from the SA Reserve Bank (SARB), the total rand-denominated deposits in the system amount to R3.1 trillion. In addition, according to the SARB Quarterly Bulletin, there was R264 billion of assets lying in money market unit trusts. It would take a fraction of the huge cash balances in the SA economy to provide mortgage funding to the 50% of South Africans that do not currently have access to it.

What is holding the lending industry back from offering these much-needed loans on better terms to the most vulnerable in our society? There are three main reasons, in my opinion. Firstly, lenders are extremely conscious of risk. They cannot and will not give a mortgage loan to someone who does not have a title deed. They are also wary of providing loans to groups that they consider more risky. To address this concern, there should be the push discussed above to ensure that all properties are properly registered; Government should provide some level of subsidy to encourage such loans and to mitigate risk (whether it be through tax relief, higher BEE scores, concessions on future BEE requirements, etc.); and lenders should price for these risks (i.e. offering average interest rates of say 18% vs. the 13% typically charged on existing mortgage book, but still well below the 26.5% on unsecured credit).

Secondly, credit providers are often wary of entering markets where they do not have sufficient data and systems (to price with comfort). To address this concern, it is important to start putting toes in the water. These markets can only be better understood and priced for over time. And the time is now. In addition, there are many unsecured credit providers that have large client databases and could conceivably use these data to better price alternative products (mortgages vs. unsecured debt). It would take a decision from shareholders and management, possibly driven by encouragement from the wider SA populace, including Government, to take the leap into this market segment.

Thirdly, credit providers make more money from unsecured lending than they do from mortgage lending. This may be a more difficult concern to address, but it is not impossible. As long as mortgage lending in the under-serviced market is properly priced for, there is no reason why it should not be profitable to lenders. It may not be as profitable as unsecured lending, but it may well be more profitable than current mortgage lending. In addition, it should be considered good for the economy and for long-term growth within the banking sector. It is therefore necessary to take a leap, which may involve a gradual transfer of products. Such a leap may affect the bottom line in the short-term, but over the long-term, it could be very positive for the country. It is important that shareholders and management consider the greater good and act in a socially responsible manner in this regard. I am hopeful.

I challenge Government and credit providers to sharpen their pencils, to be innovative, to think of the greater good, to be compassionate to the most vulnerable people in our society and to come up with solutions. Use your skills, your infrastructure and your commitment to our country to help unlock the huge potential sitting in underutilised property as a form of security. History will judge you.

Did you know that interest rates are so much higher for people that cannot offer security? Did you know that over half of South African home owners are not currently using their homes as security for loans? Do you think that this offers a meaningful opportunity? Do you think that credit providers and banks will grab this opportunity or will we just keep talking about it? I would love to hear your feedback. Comments are welcome on my website.

In the mean time, keep your talking straight!

#UnsecuredCredit #Mortgages #Credit

Marius Strydom is the CEO of MLAX Consulting

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