Friday, 2 May 2014

UBUNTU Party Explains Home Loans at 0% Interest

By Stephen Goodson: ex director and shareholder of the SA Reserve Bank and Ubuntu Candidate.

Under the existing paradigm if a buyer of a house wishes to finance it, he/she applies for a loan from a bank and then is required to repay it over a 20 year period plus an annual interest charge of 10% per annum as well as other sundry expenses. Most people are under the impression that the bank loans this capital sum by utilising the savings of a depositor and the difference of 4% in interest rates (10% for the borrower and 6% for the saver) represents the bank’s profit margin.

This is NOT the case.

Provided that the bank has lodged sufficient reserves with the SA Reserve Bank such as cash and Treasury bills, it can lend up to 14 times that amount for home loans. What the bank then does is to credit the home loan account of the borrower with say R500,000, which is then represented as an asset on its balance sheet and at the same time creates a fictitious deposit of R500,000 as a liability in order to balance its books. The bank then charges 10% interest on the loan – money which has been created out of nothing or thin air.

This method of finance is not only immoral, it is fraudulent. As a result of this deceitful practice it comes as no surprise that homeowners spend more than 50% of their after tax income on repaying capital and interest (as opposed to the accepted norm of 25%) and that almost everyone is struggling to survive in a sea of debt.

The UBUNTU Party proposes to solve this problem with immediate effect, by establishing a People’s or State Mortgage Bank. This bank will issue loans at 0% plus a small handling charge, which is necessary in order to run the system.

What do local experts think? In an article in the SA Real Estate Investor of May 2011, Introducing the Sovereign Man Breaking Free from Financial Checkmate, Robert Vivian, Professor of Finance and Insurance at the School of Economic and Business Sciences at the University of Witwatersrand questions the morality of banks not lending their own money, but creating it out of nothing and then charging interest on it. He states that “A management fee payable to the bank managing the system seems more appropriate.”

New Zealand provides a good example of a state financed mortgage system that has worked successfully in the past. In 1935 New Zealand’s agricultural exports of meat, wool and dairy products were badly affected by the artificially created Great Depression, and were down by 40% compared to five years earlier. There was much poverty and the unemployment rate rose to 27%. Many home owners lost their properties as they were unable to service their mortgages, and were forced to live in squatter camps. There was rioting as a result of food shortages. In November 1935 the Labour Party came to power and in January 1936 amended the Finance Act, which enabled the establishment of a State Housing Project. The first £10 million was provided at an interest rate of 1% per annum, while further advances in excess of that amount were charged at 1 ½% per annum. Within three years everyone was properly housed. The Act also included a public works programme, which enabled the building of hospitals, schools, airports, dams etc. The unemployment rate declined by 75% to less than 7%.

Under the UBUNTU Party’s proposal for 0% home loans it will be possible to house the entire population in proper housing (not RDP or NDP matchbox houses) within a period of five years. Not only will this policy create a boom in the housing industry, it will have a positive impact on many related industries, as well as manufacturers of furniture and other household goods.

Millions of new and permanent jobs will be created and all other sectors of industry can follow this simple process, creating financial stability for every South African. This is the short-term UBUNTU plan of action and we have no doubt whatsoever that this will be the outcome, based on sound empirical evidence.