Competition Breeds Innovation

Private Property South Africa
Gina Schoeman

Competition Breeds Innovation: Equity Release Mortgages

If you're looking for a home loan with your name on it, a competitive home loan

market is the place to explore.

Competition, in its most basic form of definition, is mostly brought about by

increases in the level of activity in the property market, together with an

increase in the demand for home loan products. Although new participants have

appeared in the overall South African mortgage market, the major home loan

providers have remained relatively the same - Standard Bank, Nedbank, FNB, SA

Home Loans and Absa - all competing for a piece of the home loan pie.

Competition breeds innovation. As a result, innovation in home loan products

over recent years has largely been fuelled by a more informed consumer base that

holds a greater bargaining power. Reflecting on global levels, the number of

variations on traditional mortgage bonds is vast; anecdotal evidence suggests

that markets as competitive as the UK possess in excess of 300 variations of

home loans on offer.

2006 appears to be the start of a higher level of creativity in the home loans

product market. So far, the year has experienced a variety of offerings; from

products directed at the affordable housing market to fixed rate offerings - all

designed with the aim of offering a more specialised product to a more

discerning target market. In the market aimed specifically at the Senior

Citizens of the country, Equity Release Mortgages are a prime example of a

variation on the typical 20-year variable rate mortgage bond. Having been

available in various other global markets, and now being offered in South

Africa, debate exists around the longer-term consequences of such a product.

In response to an older market embarking upon retirement, the basics of an Equity Release Mortgage are as such:

  • Generally, when house prices increase, the newfound equity can

    traditionally only be realised if the property is sold - something the

    homeowner does not necessarily prefer to do.

  • In response to this obstacle, individuals are given the option of

    realising either the full value or a portion of the assessed property value

    by bonding the property to a bank, and thereafter receiving either a monthly

    instalment amount for a fixed number of years, or a lump sum payment (a

    popular variation is to include a retirement annuity scheme in the

    offering).

Having previously examined the aspects of Equity Release Mortgages, Standard

Bank is currently exploring the fundamentals pertaining to our local market.

South Africa possesses a unique market in the company of a wide range of

specific needs and preferences. Allowing such a product on the market requires

thorough investigation in order to provide responsible lending products to

individuals.

Some of the major considerations to be taken into account when offering an Equity Release Mortgage are:

  • The moral hazard that may transpire with such a product. An Equity

    Release Mortgage holds the possibility of creating conflict between possible

    heirs who may inherit the property. Should this property be opened fully or

    partially by the bank at the time of the bondholder's death, this may create

    agitation between the remaining family members.

  • Ensuring that the individual is rendered no worse-off from taking on

    such a product in regards to the investment portion of the offering (the

    annuity scheme portion).

  • Offering a product that already takes all tax implications, including

    both income tax and capital gains tax, into account.

The implications of this product in the South African market are yet to be

experienced. Individuals considering an Equity Release Mortgage must take

certain factors into account. Firstly, they should consider whether an Equity

Release Mortgage is a responsible and realistic alternative to rather selling

the property and moving into a less expensive home (or a rental option).

Secondly, they must assess the current level of house price growth in

consideration of the future level of the property market, as this will strongly

influence the position of their property value when holding an Equity Release

Mortgage. The main advantage of this product is that it offers to assist those

striving to retire in a comfortable and worry-free manner. The product's

success, however, depends to a great extent on the manner in which it is

structured.

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