How your retirement savings can open the door to owning a home

A loan from your pension or provident fund to finance your property purchase – if the fund’s rules allow for this – could be an alternative to taking out a mortgage bond. reports

Instead of using a mortgage bond to finance a property, an alternative is to take out a pension-backed housing loan. This is an attractive option for lower-to-middle-income earners who have been continually employed for a number of years and have built up substantial savings in their retirement funds.

The financial services industry has traditionally frowned on the use of retirement savings for purposes other than providing you with a secure income once your working life is over.

But the circumstances of many South Africans are such that experts in the industry are coming round to the view that, provided lending is carefully controlled, employees’ retirement savings are a valuable asset in enabling people to enjoy a better quality of life while they are still working. One of the best ways to do this is through assisting employees to become property owners, because property generally appreciates in value and ultimately forms a substantial part of a household’s wealth.

Last year’s Alexander Forbes Benefits Barometer, the financial services company’s comprehensive annual survey of employee benefits in South Africa, devoted a chapter to “Housing as a stepping stone to well-being”.

It spelled out the need for more employees who earn between R7 000 and R25 000 a month to live in their own homes (currently, about 46 percent do) and for employers to be more actively involved in their employees’ housing arrangements. One way to do this is to provide loans through their pension or provident funds.

The Pension Funds Act provides for such loans, which may be a direct loan from your retirement fund, or, as is more typically the case, a loan from a lender such as a bank, with your savings in the fund providing surety, or a guarantee, on the loan.

The fund to which you belong must, in its own rules, provide for the granting of such a loan.

The Pension Fund Act reads: “A registered fund may, if its rules so permit and subject to the regulations, grant a loan to a member ... or furnish a guarantee in favour of a person other than the fund ... to enable the member … to acquire immovable property on which a residence has been or will be erected, or to erect a residence on immovable property … or to make additions or alterations to or to maintain or repair a residence [owned by] the member or his or her spouse and which is occupied or will be occupied by the member or a dependant of the member.”

The loan must be for a primary residence. In other words, it must be for the home in which you and your family live, or plan to live, not for a second property or an investment property.

The Act provides for a loan of up to 90 percent of your fund value, but your fund or the lender through which the fund has an arrangement may have a lower limit – 60 percent, for example.

The Act stipulates a maximum repayment period of 30 years, with the condition that, if this extends beyond your retirement date, “the outstanding balance of the loan on that date must be able to be repaid out of no more than one-third of the total value of the benefit due to the member at that date”. Again, individual funds or lenders may set their own repayment criteria.

If an employer, through its retirement fund, offers pension-backed housing loans, the responsibility falls on the employer and/or the trustees of the fund to ensure that the money borrowed from the fund, or borrowed against a surety from the fund, is used for the purpose intended: to help finance the purchase of a property or to finance renovations on an existing property. This can prove onerous for the employer and fund.

Three of the big banks, Absa, First National Bank and Standard Bank, offer pension-backed home loans in partnership with various retirement funds across the country. There are also smaller financial services companies in this space, such as the Musa Group, which, through partnering with the Gauteng Partnership Fund, a provider of low-income housing, offers these loans to the low-income market in the Gauteng area.

martin.hesse@inl.co.za