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.
