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

Personal Finance

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 continuously 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.

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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.


PROS AND CONS

A pension-backed housing loan has the following features:

- It is available to lower-income employees who may not qualify for a mortgage bond.

- For lower-income earners, it may be used in conjunction with the Finance Linked Individual Subsidy Programme (Flisp) government housing subsidy.

- It may be used in conjunction with a regular mortgage loan – as a deposit on a property, for example.

- Because it is not bonded against a property, there are no bond registration costs or associated lawyer’s fees.

- There are no property assessment fees.

- The rates are relatively low, because of pension funds’ negotiating power with lenders.

- Repayments are linked to your company’s payroll and come directly off your pay.

The drawbacks are:

- You will typically be required to pay back the outstanding loan amount if you resign from your job, or the amount may be deducted from your pension benefit, in which case you will have to pay tax on the amount as if you had withdrawn it.

- Unless you have been contributing to the fund for a long period, the amount you are able to borrow may not be very large.

- If you default, the bank will recoup the amount it is owed from your pension fund. Again, there will be tax implications for you.


CONDITIONS AND HOW TO APPLY

Lenders and retirement funds have tightened up on the lending criteria for pension-backed housing loans, because there was some abuse of them in the past, with the loans used for things other than property transactions.

The first thing to do is find out from your employer’s human resources department what your employer’s fund offers and what its requirements are.

The requirements by Absa, First National Bank and Standard Bank are roughly similar:

- You must be over 18 years of age;

- You must be formally employed and belong to your company’s pension fund or provident fund;

- Your pension fund, employer and bank must have a loan scheme arrangement;

- You must have built up a certain amount in your retirement fund (Standard Bank’s requirement is R7 000);

- You must have been employed at your current employer for at least a year;

- You must have no administration orders against you;

- The bank will do a credit assessment on you before issuing the loan;

- You may only borrow up to a certain percentage of your pension benefit (Standard Bank’s requirement is 50 percent);

- Your monthly repayments may not exceed a certain percentage of your net income (Standard Bank’s requirement is 25 percent);

- Interest charged on your loan is linked to the prime lending rate;

- There may be a once-off loan initiation fee (Standard Bank charges R450) and small monthly administration fee (Standard Bank charges R16.40);

- The bank may offer you credit life assurance to cover the loan in the event of your death or disability, but first make sure whether your existing life and disability cover will suffice; and If you are placed under an administration order, the bank may recall your loan.

You will have to provide the following documents:

- Your identity document;

- Proof of residential address;

- Salary pay-slip/s;

- The past three months’ bank statements if you do not have a transaction account with the bank;

- Proof that you will use the loan for housing purposes (for example, an offer to purchase a property, a building quote or building plans); and A breakdown of your average monthly income and expenditure.

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