What is affordable housing? Who may apply for affordable housing? Where does affordable housing fit into the South African market? These are some of the questions that are asked by so many prospective home buyers and rightly so, because this is a niche market which is too often misunderstood by the average person on the street. Then some people refer to affordable housing as the GAP market. Is this the same market or not?
Traditionally the housing market consisted out of the low income market and then the middle to high income market. The low income market provides for government subsidized homes. The rest of the housing market is generally made up by the middle income and higher income class. These are the normal mortgage bonds financed by the banks and other financial institutions that everybody on the street know about.
Then there is the other market that was almost forgotten about for so long. These are the lower-middle income households and this market is ever growing, especially in South Africa. When we look at the affordable housing market, it was initially made up of government employees, such as teachers, nurses and the police force. These individuals are unable to purchase a starter home by means of a conventional home loan as they earn below the banks’ minimum entry threshold to purchase an investment grade home. At the same time these individuals earn too much to qualify for a fully subsidised government house.
Naturally these two criteria’s created is gap in the housing market, hence the existence of the GAP market referred to by so many people. This also paved the way for the need to create a customised financial vehicle, now known as Affordable Housing Finance.
Employees earning up to R3500.00 per month qualify for government subsidised housing, but the GAP market compromises of those individuals earning above this threshold, but not enough to be assisted by most conventional banks. A key means to unlock housing supply at the lower end of the market would be to facilitate and promote resale. Government-subsidised properties carry an 8-year restriction on resale, but at expiry of this period the increased value of these properties would fall within the target range of the affordable housing market. Over and above this, there are numerous affordable housing developments mushrooming all over the country. Just more than two years ago, the affordable housing market was already estimated at R75 billion, largely untapped potential creditworthy buyers.
This very substantial gap was identified and certain financial institutions, in collaboration with the government addressed the various hurdles to provide a distinctive solution. This opened a new avenue to many people with the desire to own their own property and start creating wealth.
According to the Consumer Credit Market Report, published earlier this year, a total of at least 28,19% of mortgages granted fall within the affordable housing market. The table below indicates the total amount of mortgages granted by banks during the first quarter of 2018 to the end of the first quarter of 2019.
Mortgages granted – number of agreements by size
Although the criteria by the various financial institutions offering affordable housing finance, may be more favourable towards the potential home buyer, credit records must be kept clear as with any mortgage bond application. No financial institution will grant credit to any person with an adverse credit record. Although the property value in the affordable housing market may rank lower than the middle class market, the credit risk towards these financial institutions remain the same as with any other property.
When applying for a mortgage bond in the affordable housing market, the financial institutions apply slightly different criteria when assessing these applications. Differences do apply when assessing the applicant’s credit scoring and affordability. An application for mortgage finance in respect of affordable housing, may be treated more favourable when looking at affordability than what the conventional banks would consider, taking into account the same income of an applicant.
Potential home buyers should always keep in mind that they will be liable to pay transfer fees as well as mortgage bond registration fees to the relevant legal firm or firms attending to the property transfer process. In many instances, especially with first time home buyers, people don’t know about these costs. Occasionally these home buyers know only about the transfer costs and not the bond registration costs and vice versa. This may come as a shock and sometimes the whole deal gets cancelled as these people just do not have the funds available to pay for the conveyancing fees.
In conclusion, those of you longing to own your own house, but thought that you would never be able to enter into this market, there may still be light at the end of the tunnel. Feel free to contact our offices and enquire about the products possibly available to you. You may just become the proud owner of your own home.