Pension-backed home loans can be a game-changer

Pension-backed home loans can be a game-changer

Private Property South Africa
Kerry Dimmer

Discover more about the pension-backed housing loan, a new solution in the industry that allows homeownership.

All over the world, if you have an asset, you are enabled – conditionally - to unlock access to home loans. The most common tangible asset is a residential property, which historically has proven to be the best return on an investment. Markets swing up and down, but a property will never be devalued to zero largely because the land tends to hold its value. The same is not true however of the building that is sited on a residential erf.

A general rule of thumb is that house buildings can be lived in for up to a century and beyond if maintenance is ongoing. Add a new roof, a new extension, revamp bathrooms and kitchens, and you can add another 20 years to the liveability of the structure each time such a renovation is undertaken.

It is however a very difficult market currently. Consumers struggle with rising costs caused largely by a weak economic climate with properties appreciating at less than inflation. This has created a very strong buyer’s market, however South African’s are astute and will drive a hard bargain even if an already discounted home comes with some major structural problems caused by lack of maintenance.

The industry is constantly trying to find ways of enabling homeownership through various solutions. One such example is the pension-backed housing loan. If you have been contributing to an employer-employee pension fund over a number of years, and depending on the type of fund and its stipulations, you may be able to access credit to do those much needed repairs or buy a new home by leveraging a percentage of the capital you have acquired, up to in most cases, some 60%.

Nondumiso Ncapai, Head Product, Home Loans at Absa Bank provides an unbiased perspective, given that Absa Bank currently does not provide such a product. “As a member of a pension fund, the Pension Funds Act 24 of 1956, allows an individual to access credit for housing purposes using their accumulated capital in the pension fund as a guarantee against a (home) loan.

“This means, in terms of the law, that you can buy an existing home, build a new home, improve an existing home, and provide additional security for your home loan in the absence of a deposit.”

Ncapai points out however that while this might appear to be an attractive option for potential homebuyers and homeowners who have built up substantial pension benefits, each pension fund has its own rules for access to pension benefits for housing loans. “But there are many advantages, particularly in tough market conditions such as we are experiencing currently.”

Advantages of a pension-backed housing loan:

  • It may be used in conjunction with the Finance Linked Individual Subsidy Programme (FLISP)* government housing subsidy if the criteria is met by the applicant.
  • It may be used in conjunction with a regular mortgage loan – in the absence of a deposit on a property.
  • It can be used to buy vacant land, build a house, or improve one’s current home.
  • Favourable terms (up to 30 years or as defined by the pension fund rules), interest rates, and fees on the loan can be negotiated with the fund.
  • They are provided to employees of participating funds and/or employees irrespective of their income bracket.
  • If the prime lending rate changes, the loan term is adjusted rather than the repayment amount (dependent on a number of facts such as age, income, and pension fund conditions).

Tax and repayment implications

Where this facility becomes murky is on termination of your membership with the fund - the outstanding loan amount will be deducted from your pension fund benefit, in which case you will have to pay tax on the amount as if you had withdrawn it. Ncapai says: “Another consideration is the amount you are able to borrow may be limited by the specific rules of the pension fund, and if you fail to make regular payments on the loan, the bank will recover the outstanding amount from your pension fund, although banks only consider this as a last resort.”

Pension backed home loans are not considered to be of benefit to those nearing retirement (within five years) as the loan needs to be repaid by retirement age as set out by the fund. Banks also have an obligation as per law, not to put individuals at risk of losing their ability to support themselves. Similarly young or first-time homeowners may not have the capital in their pension fund to sustain a loan repayment.

Pension-backed loans, either through an agreement with the employer and or the rules of the fund, are either provided directly to the employee or in the form or a guarantee to the bank providing the loan. If direct to the employee, there will be a contractual agreement regarding the repayment, which is usually deducted from the monthly salary.

The FLISP programme is a housing subsidy for first-time home buyers to assist with purchasing a home. The subsidy is paid to your bank or financial institution and will reduce your monthly loan instalments, making it more affordable to purchase a home.

To qualify for the FLISP subsidy, you must meet strict criteria, inclusive of:

  • Home loan must be approved
  • Must be a first-time home buyer or existing home owner (and meet other criteria)
  • Total gross/combined household income must be between R3 501-R22 000 per month
  • Be an SA citizen or in possession of a valid permit
  • If single, you must have a dependent.

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