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Traditionally, mortgage applicants consisted of two people (whether married or otherwise), but now banks are launching lending solutions that enable groups of people to buy a house together.
Back in August, First National Bank (FNB) launched a home loan product, the Collective Buying solution, that allows up to eight people to buy a property collectively and take out a home loan for up to 30 years.
We spoke to home loan professionals who further unpack the pros and cons of the collective home loan, also referred to as the property stokvel.
Interest rate impact
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Interest rates on mortgages are calculated based on applicants’ credit health. The better the credit score, the more likely that an applicant will be awarded a low interest rate on their mortgage. There is no maximum credit limit for this product – instead, the home loan is based on the collective affordability of the applicants. With several applicants in the mix, the interest rate could be negatively affected by the person with the worst credit score.
‘The solution is assessing each of the applicants in their individual capacity, so if one has an impaired credit profile, they would not be granted the loan and the collective would have to decide whether to proceed without that one person or wait for a time when that one customer has improved their profile,’ says Mfundo Mabaso, growth head, FNB Secure Lending.
But when it comes to the interest rate, buying a home as a collective has its advantages too.
‘If we consider the fact that with collective buying there are more customers to help cover the repayments, it lowers the chance of default and therefore the interest rate might be more favourable.
‘In the same way then, the greater number of customers on the account are more likely to be able to put down a deposit, holding them in good stead to get a favourable interest rate,’ says Mabaso.
Buy to rent
The product is also available to families and friends who intend to buy the property with a view to renting it out soon after or at a later date.
‘They can buy the property for the purpose of renting it out, or even as a holiday home that they can share,’ explains Mabaso.
Will other banks follow suit?
According to Andrea Tucker, director of online bond aggregator MortgageMe, FNB are the first and only bank to market with a specifically named product.
She adds: ‘However, most other banks will currently allow up to a maximum of eight co-applicants to apply for a home loan. FNB are just the first to formalise group home buying through a stokvel and give it that name.’
The pros
Property stokvels allow a large percentage of low- to middleincome families in South Africa to get onto the property ladder.
‘By pooling financial resources, larger properties can be purchased, and the group can benefit from the compounding principle. A deposit of R500,000 will get you a far bigger property than one of R100,000.
‘Joining a stokvel encourages saving behaviour through cooperation. By joining and participating, it becomes obligatory to save and make your monthly contribution or else you’re excluded from the club. This provides security and protection from circumstances out of one’s control,’ says Tucker.
The cons
If one person defaults on their monthly instalment, it can put pressure on all the other homeowners of the stokvel.
‘This can negatively impact the credit rating of all participants, as everyone is jointly liable for the loan. The group’s approach to this must be discussed and contracted upfront, and if possible, a slush fund should be invested to cater for occasional payment shortfalls,’ says Tucker.
How can you apply for FNB’s product?
To kick-start the home loan application journey, customers can submit the application via the FNB app. This permits up to eight applicants, inclusive of applicants who are married in Community of Property (COP), to be added.
Should the number of applicants exceed eight parties, this can be applied for in-branch. The Collective Buying product allows for up 12 people in total to apply.
