Reducing loan interest, longer repayment term for affordability

LAST Wednesday, The National’s reporter REBECCA KUKU dealt with the gargantuan challenges and the history of the Government’s efforts to provide affordable houses for Papua New Guineans. In this second part of her report, she looks into the details and qualifications for Government-assisted funding

THE interest in home ownership and for affordable home loan products have been high since the introduction of Bank South Pacific (BSP)-Papua New Guinea (PNG) Government’s (GoPNG) First Home Owners Scheme (FHOS) in 2014.
Under GoPNG, the Government provided BSP with an initial funding of up to K200 million as deposit to support its initiative to improve credit access to Papua New Guinean first home buyers.
The scheme is now considered a catalyst for growth in the housing market. The market has since become attractive to property developers who started building affordable houses in Port Moresby.
Some of the developers have already invested in the market, selling home packages that comprise of land and building, while others have products to offer but are unable to secure land.
FHOS is a medium to long-term loan available for the construction of houses to be occupied by the borrower on a vacant state titled land.
The loan is also available to buyers of new houses that are no older than six months.
FHOS can be accessed by any natural born Papua New Guinean who are permanently employed either in the public service or private sector and who, with their partners (married or defacto), do not already own or part own any property on state leased land.
Eligible employees of the public service and private sector that meet the requirements, credit conditions, repayment and loan serviceability standards of the bank can apply.
Those who have established home ownership schemes to support employees own their first houses can also apply.
The only rule being that the property cannot be leased/sub-leased or rented.
However, restrictions will apply on refinancing or resale of the property under this scheme. The loan must be for the borrower’s first home and must be owner occupied.

The FHOS Loan
Loans can be obtained from under this scheme at a minimum of K200,000 and up to K400,000.
The minimum and maximum loan amounts are subject to debt servicing ratio not exceeding 40 per cent of the borrower’s gross base income.
The maximum term of the loan is 40 years. It is not pegged to the borrower’s age of 65. The loan can be transferred or amended to include the borrower’s immediate dependents, upon them securing employment to assist with future loan repayments.
Total loan repayments will not exceed 40 per cent of the total base income of the borrower/s. Where salary deductions cannot be facilitated, a Standing Order Authority can also be used.
This loan is available within PNG and applications can submitted to any BSP branch whilst the loan is subject to the bank’s normal credit assessment and approval.
All one off costs, including loan establishment fee at settlement and first year insurance costs and land tax can be added to the total loan amount in the initial assessment process.
Redraw facility is available to cater for annual recurring costs only, such as insurance policy renewal and land tax.

Fees and Government Charges
A Once-Off Establishment Fee is calculated at 1 per cent on the approved loan amount. There are no other fees applicable to the product for the entire term of the loan, meaning that all loan arrears (interest and principal) will result in default interest charged at the standard rate. And all other bank fees will be exempted on origination of the loan; only applicable fees are government and statutory fees.

Eligibility
The FHOS loan isavailable in PNG only and is applicable to natural persons who are citizens of PNG and who:

• ARE applying for a home loan with BSP;
• DO not own, or part own a property under a state lease;
• WHOSE spouse or defacto partner does not own, or part own a property under a state lease; and
• HAVE not already applied under any other housing scheme arrangement.

Requirements

• COMPLETED BSP FHOS loan application;
• PROVIDED three (3) latest pay slips;
  CONFIRMATION of letter of employment from employer disclosing salary and housing allowance (if any) or copy of contract of employment;
• COPY of title deed from vendor confirming ownership of land and lease is state-owned;
• EVIDENCE and proof of 10 per cent equity contribution;
• STATUTORY declaration – declaring that no other properties are held by the borrower/s and that this acquisition is the first home that will be owner-occupied;
• STATEMENT of outstanding debts with other banks or lenders showing three months transactions; and
• PROVIDE three (3) months statement if another bank customer.

Papua New Guineans who wish to obtain a loan must bring with him or her the following documents at their nearest BSP Bank.

• Completed BSP home loan application;
• THREE (3) latest pay slips;
• CONFIRMATION letter of employment from employer disclosing salary and housing allowance (if any) or copy of contract of employment (if any);
• LETTER of offer disclosing the purchase price; and
• ACCEPTANCE of offer by the vendor.
• COPY of title deed from vendor confirming ownership;
• EVIDENCE of 20% equity contribution;
• STATEMENT of outstanding debts with other banks or lenders showing three months transactions;
• PROVIDE three (3) months statement if you bank with other banks.

The majority of loans funded are mostly in Port Moresby, largely due to market size and increased interest from housing developers. However, interests from potential house buyers also remain nationwide, from young professionals to long-serving employees in both the public and private sectors.
There are currently 54 registered property developers registered with BSP that Papua New Guineans can buy their FHOS houses.
However, like all things, there has also been many criticisms on the BSP FHOS, with many critics alleging that it is beyond the reach of the majority, and that it has been impossible for an average worker on a K30,000 per annum salary to put up a 10 per cent deposit to get a K200,000 loan with regular fortnightly repayments over 40 years, given the high cost of living in a city like Port Moresby.
Most middle and low-income Papua New Guineans are unable to access this loan.
In 2016, a news report (not The National) carried the headline “NRI: Government Housing Scheme beyond reach”.
The report stated that the Government’s so-called FHOS was beyond the reach of most citizens, and that, it was almost impossible for an average worker on a K30,000 per annum salary to put up a 10 per cent deposit to get a K200,000 loan with regular fortnightly repayments over 40 years given the high cost of living in a city like Port Moresby.”
At that time, BSP general manager (retail) Paul Thornton said that while there were many constraints to affordable home ownership, there were concerted efforts by both the private sector and Government to overcome the problems.
“BSP has significantly changed the nature of housing loans products. In the past, a housing loan would normally be for a term of 25 years, have an annual interest rate of 8 per cent and require an equity contribution of 20 per cent. This would result in fortnightly repayments of around K1,425.
“With the introduction of the FHOS loans, the term of the facility has been extended to 40 years, the interest rate reduced to 4 per cent and require only a 10 per cent equity contribution. This reduces the fortnightly loan repayments to about K771.”

Thornton added: “In relation to the BSP and GoPNG’s FHOS, it is also important to understand that BSP has not been given a grant of K200 million to lend to FHOS house owners. Rather, the Government has placed the funds with BSP to enable the bank to reduce its cost of funds and offer a home loan product with low interest rate, longer repayment terms and special eligibility requirements.
“The FHOS is for newly constructed houses and this is driving employment at a time when it is most needed. Customers who are not FHOS or who are borrowing for existing houses or for amounts higher than K400,000 with owner-occupancy, can still obtain a standard housing loan for a term of 40 years at rates between 7 per cent and 8 per cent.”
Thornton also told The National in a recent interview that with regard to the 10 per cent equity (or down payment), borrowers could raise this from a variety of sources.
“Some employees assist their staff make that equity contribution but most borrowers obtain their equity as an advance against their superannuation contributions. The maximum loan amount is K400,000.
“Because the term of the loan is relatively long (40 years), it is in the interest of the house owner and the bank to ensure that the house is built using quality materials and constructed by a qualified builder. For a similar reason, the FHOS applies to new houses that are no more than six months old.
“The repayment for a K200, 000 loan at an interest rate of 4 per cent per annum over 40 years is about K385 per fortnight. Not all borrowers are the same and many have different financial and family commitments but based on an annual salary of K30, 000 repayments of K385 per fortnight represents 34% of their gross income before tax and other expenses.
“Buying a house is a commitment and in addition to making regular fortnightly loan repayments, a house owner will also need to set aside or save funds to cover annual insurance premiums, land rates, water rates and council charges. They should also put aside funds to complete occasional maintenance on the house to ensure that it is always kept in good condition.
“Since introducing the FHOS, BSP has approved 850 loans and the number is rising steadily.
“It really is in reach of many people but it is also a long term commitment,” Thornton said.