It is cheaper to take three small micro loans over two years, each at 46 percent interest, than to take one mortgage loan for 20 years at 20 percent interest, says research officer Mary Tomlinson.
Tomlinson has just completed a study into banks and low-cost housing delivery for the Centre for Policy Studies, an independent research group.
She found that efforts by banks and the government at making finance available to low-income borrowers have not worked.
However, micro loans (short to medium-term loans of less than R20 000) offered by "non-bank" lenders is the key to providing finance to low income people, she says.
The non-traditional lenders, which are more formally known as community-based retail lenders, were first established in the late 1980s to provide small loans, rather than mortgage bonds, for housing and other needs.
These new retail lenders and some of the financial institutions, such as the Rural Finance Facility, Cashbank, The Perm and Standard Bank, have developed small loans which are secured by your pension or provident fund.
Other non-bank lenders such as Altfin, King Finance and Great Northern Credit make unsecured loans available to low-income borrowers.
In both cases, the determining factor for the loan is that you must be formally employed and the loan providers must be able to collect your repayments through a payroll deduction facility.
Franz Pretorius, chief executive of Altfin, says the reason why micro loans work out cheaper than traditional mortgage loans, with their comparatively lower interest rates, is the "force of compound interest" (interest paid on interest).
Mortgage loans in the low-income market are generally for R55 000 and have a repayment period of 20 years with a variable interest rate. Because of the large amount and the long term, they require greater security, with the property acting as collateral for the loan.
Administration costs, generally R600 to R1 000 a year, are also high, says Tomlinson.
Micro loans, on the other hand, are generally for between R8 000 and R20 000; have a repayment period of 36 to 120 months; and charge an interest rate of prime (now 19,25 percent) plus three percent for secured loans. The loan is backed by a pension, rather than by the property itself.
For unsecured loans, the loan is generally less than R6 000; the repayment period six to 24 months; and the interest rate 40 to 69 percent due to the higher risk.
The Usury Act provides no ceiling on the interest rate that may be charged for loans below R6 000.
For you, as a borrower, the advantage of a micro loan is that it is less complex; the costs are far more transparent than for a mortgage; the term is shorter; and there are no costly bond registration fees.
The interest rate is fixed with the total cost reflected upfront in the loan amount. There is no compounded daily interest.
Because the loan is made against you, the borrower, rather than against bricks, there are no prerequisites on the size, location and construction of the property, she says.
For households with an income of less than R3 500 a month, traditional mortgage loans have "proven an onerous instrument".
"Not only does it bind them to a long-term financial noose, it often reduces the value of the investment, due to the costliness of the lending instrument," Tomlinson says.
Comparison between micro loans and standard home loans
On one micro loan of R6 000 at an interest rate of 46 percent, over a term of 24 months, your monthly instalment will be R386,83. If you take out two further such loans after paying each one back, you would have paid R387 X 72 months (six years) = R27 864
If you take out a bond of R18 000 at an interest rate of 21,25 percent and pay it off over 20 years, your monthly instalment would be R323,54. So, R324 X 240 months (20 yrs) = R77 760. You would have saved yourself R49 896 by opting for three micro loans instead of one mortgage loan.
A micro loan of R20 000, at an interest rate of 24 percent over three years, will cost you R784 a month - R784 X 36 months (three years) = R28 224.
If you take out two further loans after that you would have paid R784 for a total of nine years - R784 X 108 months (nine years) = R84 672
A mortgage loan of R60 000, at an interest rate of 21,25 percent over 20 years will cost you R1078 a month. So, after 20 years, you would have paid R1078 X 240 months = R258 831.
In this case you would have saved R174 159.
Information supplied by Altfin