It’s called reverse mortgaging and is a way for cash-strapped retirees to supplement their monthly incomes by relinquishing some home equity. From Moneyweb.
Reverse mortgages made a brief appearance in SA just prior to the financial crash of 2008 but then vanished from view. There’s been little appetite from SA banks for them because the borrowers are generally elderly. It’s a different story overseas, where this is a fast-growing business.
Reverse mortgages are now back in SA, this time with a difference: Water Financial last week announced that it was issuing 30 000 tokenised preference shares that will raise R30 million – the first of several planned fund raises – paying a monthly dividend to 87% of the prime lending rate. The tokens will be traded on the newly launched tokenised asset trading platform Mesh.trade.
Listen: Will tokenised assets one day rule the world?
The minimum subscription amount is R10 000, with a five-year term.
The loan-to-value (LTV) amount ranges from about 10% to 50% of the home value, with the average LTV to date being 8.91%.
After year four, a second valuation is undertaken, and borrowers have the option to continue the five-year term provided there is sufficient equity in the home and potentially at a higher LTV.
“The solution is designed as an ethical financial vehicle that enables retirees to meet the escalating cost of living without sacrificing their primary asset,” says Chris Loker, founder and managing director of Water Financial.
The company’s board includes former Comair CEO Gidon Novick and former trade and industry minister Alec Erwin.
Huge business
Reverse mortgaging is a huge business in countries such as the US, where people short of cash in retirement can tap into their home equity and receive a monthly dividend.
Unlike ‘forward mortgages’, which are used to buy houses, reverse mortgages do not require the borrower to make any monthly repayments. The loans are repaid when the borrower sells the property, moves out, or dies.
Market research by Water Financial shows pent-up demand from pensioners for reverse mortgages that allow them to retain title to their homes but supplement their incomes by tapping into unused home equity.
Pensioners are reckoned to account for 320 000 bond-free homes in SA, giving an indication of the potential size of a market that is growing 1.5% a year.
The average property value in this market is R2.4 million. Water Financial has been piloting the scheme for the last three years and has yet to record a single bad loan. Ten percent of borrowers settle their loans each year by either selling, moving out, or dying.
The age of borrowers ranges from 78 to 82, a market that few traditional financial institutions will touch.
Though borrowers retain title to their homes, Water Financial is secured by a covering bond on the property.
Faster and cheaper way to raise capital
Mesh.trade, headed by former investment banker Connie Bloem, was the first in Africa to tokenise assets and recently launched the continent’s first tokenised corporate bond, Die MOS’s 10-year prime +2% floating rate bond.
Listen: What is a tokenised bond?
Tokenising financial assets is regarded as a faster and cheaper way to raise capital than via traditional fundraising through the stock exchange. It also opens the market to smaller businesses in search of capital, where tokenisation allows for fractions of a token to be traded, thereby lowering the barriers to entry for retail investors.
The Water Financial tokens, representing ownership in ‘A’ preference shares, will be traded on Mesh.trade. Loker expects liquidity in the tokens to improve as more people feel comfortable with what is admittedly a fairly exotic investment offering a steady return.
Listen/read: Bond-switching to shake up SA home loans market
The preference shares rank prior to ordinary shares in terms of dividend rights.
“We designed our platform to offer investors access to previously inaccessible investments, as well as a regulated alternative avenue for entrepreneurs looking to raise capital to fund their growth,” says Bloem, adding that the world is evolving into a new financial era where companies and investors will be offered greater access to capital raising and investment opportunities that are transparent and easy to use.
