Use your pen­sion to get a home loan

Some funds will make a lim­ited amount of cash avail­able for house ren­o­va­tions or pur­chases, but if you change jobs, the money will have to be re­paid, writes Maya Fisher-French

CityPress - - Business -

Apen­sion fund is usu­ally the largest as­set owned by an in­di­vid­ual and it makes sense that it could be used to pro­vide col­lat­eral for a home loan, es­pe­cially for a first-time home­owner. This ben­e­fit also en­cour­ages in­di­vid­u­als not to cash in their re­tire­ment funds when chang­ing jobs.

In terms of the Pen­sion Funds Act, a pen­sion fund is al­lowed to lend a mem­ber an amount of money for the pur­poses of pur­chas­ing or ren­o­vat­ing their home. Although it is al­lowed, not all pen­sion funds pro­vide this ben­e­fit, which would need to form part of the pen­sion fund rules, so you would need to con­firm with your em­ployer first.

Gerry An­der­son, chief oper­a­tions of­fi­cer at the Fi­nan­cial Ser­vices Board, says the pen­sion fund can ei­ther lend the money di­rectly or, as com­monly is the case, can is­sue a guar­an­tee to the credit provider. Usu­ally the pen­sion fund would work with a spe­cific bank to of­fer the ben­e­fit to its mem­bers.

The amount of money that can be lent to the mem­ber is lim­ited by the Pen­sion Funds Act to 90% of his or her re­tire­ment funds. How­ever, in­di­vid­ual funds have their own lim­its. For ex­am­ple, the Fi­nan­cial Ser­vices Board’s own pen­sion fund rules limit the amount its em­ploy­ees can bor­row to 60% of their pen­sion fund as­sets.

Banks usu­ally of­fer a spe­cial­ist prod­uct to cater for pen­sion-backed home loans and the monthly in­stal­ments are de­ducted from the em­ployee’s salary each month by the em­ployer. The em­ployer would also con­sider the af­ford­abil­ity of the loan be­fore ap­prov­ing it.

The loan can be used to buy an ex­ist­ing home or to build a new home, set­tle an ex­ist­ing home loan or im­prove an ex­ist­ing home.

In many cases, es­pe­cially for a first-time home­owner, the value of an ex­ist­ing re­tire­ment fund may be too small to un­der­pin the home loan, but could guar­an­tee a loan to be used for the de­posit for pur­chas­ing a prop­erty or to pay the trans­fer and bond reg­is­tra­tion fees.

Ac­cord­ing to Absa, which of­fers pen­sion-pow­ered home loans, the prop­erty must be ei­ther owned by or in the process of be­ing trans­ferred to the em­ployee or his or her spouse and must be used as the pri­mary res­i­dence of the em­ployee – so it could not, for ex­am­ple, be used for an in­vest­ment prop­erty.

There are also lim­its in terms of your monthly re­pay­ments. In the case of Stan­dard Bank’s pen­sion-backed lend­ing loan scheme, the monthly in­stal­ments must be no more than 25% of one’s monthly in­come.

The in­stal­ment is usu­ally fixed to as­sist the em­ployer to man­age pay­roll de­duc­tions. That means, in the case of in­ter­est rate in­creases, the length of the loan would be ex­tended.

The max­i­mum pe­riod of a loan is usu­ally 30 years or the length of time to your nor­mal re­tire­ment age, which­ever is lower. In other words, if you are 40 years old and your re­tire­ment age is 65, you could only qual­ify for a 25-year loan.

If you do not have a credit record, the loan guar­an­tee im­proves your risk rat­ing and the bank will be more likely to is­sue you with a home loan.

As the risk of the loan is re­duced, banks will of­fer lower in­ter­est rates on the home loan, sav­ing the mem­ber sig­nif­i­cant in­ter­est over time. Pen­sion funds will of­ten work with a spe­cific bank that is pre­pared to of­fer their mem­ber a lower rate.

Some banks, such as Absa and Stan­dard Bank, waive cer­tain fees, in­clud­ing ini­ti­a­tion, bond reg­is­tra­tion and prop­erty val­u­a­tion fees. This makes it sig­nif­i­cantly cheaper than other loans.

THE CONS

If you de­fault, you will put your pen­sion fund at risk. If a mem­ber de­faults, the fund is re­quired to set­tle the out­stand­ing amount of the pen­sion­backed loan.

From a fund per­spec­tive, there is a risk that in­di­vid­u­als are en­cour­aged to take on ex­ces­sive debt in the knowl­edge that their pen­sion fund could bail them out if they were un­able to meet their mort­gage re­pay­ments.

Should you change jobs, the home loan would have to be re­paid. You could ar­range with your new em­ployer to con­tinue with the pay­roll de­duc­tion of the loan and to ar­range with your new fund to stand surety for the loan. Al­ter­na­tively, you would re­quest your fund to set­tle the loan in full, from your with­drawal ben­e­fit, upon your ter­mi­na­tion of your mem­ber­ship. This will af­fect your fu­ture re­tire­ment fund­ing.

The level of guar­an­tee would de­pend on the value of your re­tire­ment fund. For younger mem­bers, their value may be too small to of­fer a real guar­an­tee. It does, how­ever, cre­ate a mo­ti­va­tion not to cash in re­tire­ment funds when chang­ing jobs.

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