Pension-backed home loans – your retirement fund could help you

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Increasing steadily, online property listing portals saw a decline in activity at the start of the national lockdown. With the reality of the current global recession in mind, markets do recover over time and as property prices come down, it is a buyer’s market.

Shameer Chothia, Consultant at Momentum Consultants and Actuaries says that with any big purchase, few of us have the reserves for a cash deposit and we need to look to other avenues to access a loan. One area many people overlook is a ‘pension-backed home loan’.

If you have made the decision to buy, found a property and made an offer to purchase, the next step will be to submit a home loan application to the major banks. If the bank approves a loan for less than 100% of the purchase price, you will need to find a way to fund the rest yourself. One way to obtain these funds is through your retirement fund,” he says.

There are retirement funds that offer pension-backed home loans to qualifying members who plan to use it for a primary residence. As a member, you have access to a portion of your accumulated savings as a loan towards buying property or, to pay for transfer and bond registration costs. Chothia explains that once approved and paid out, you would pay this loan back over an agreed period. Some leading umbrella funds offer this facility through the fund’s sponsor or insurer at even better rates than the banks.

A pension-backed home loan can also help existing homeowners who want to make improvements to their property to increase its value. It’s also a great time to fix up all the little bothers since many people are working and spending most of their time at home these days,” Chothia points out.

Pension-backed home loans offer numerous advantages such as no bond registration costs, low initiation and monthly fees, favorable interest rates with installments deducted directly from the member’s salary with no debit order fees. There is also a low risk of defaulting on the loan provided you are employed and earning a salary.

To qualify for a pension-backed home loan, he says you will go through the usual bank approval process with the same requirements for supporting documentation. You must be able to afford the monthly repayments and you may not have any garnishee or administration orders against you. “You may not be under debt review or sequestration and must have at least an acceptable credit score” he explains.

The size of the loan will vary from fund to fund, but it will generally be a maximum of a specified percentage of the member’s withdrawal benefit.

In Johannesburg alone, property agencies are reporting a sharp increase in sales since the drop of interest rates. This may point to a continued demand in the property market, and some experts even expect to see growth, especially among first-time buyers and properties in the under R1 million price bracket. The Reserve Bank’s decision on 23 July 2020 to cut the repo rate by a further 25 basis points to the lowest it has been in decades, will likely encourage even more buyers to take advantage of the low interest rate. For many people renting in the R1 million and below property bracket, the decrease in interest rate means that a bond repayment will be just about the same as what they are paying in rent.

We can take comfort in the fact that history has shown that markets recover,” says Chothia. He points to the 2008 financial crisis and other world economic crises, saying that many property specialists have faith in the resilience of the South African property market and that it will ultimately recover.

People who bought property just after the 2008 crisis have had excellent returns on their property investments. It’s just a matter of how long the current decrease in property value will last, but this could be the perfect time for buyers who are willing to wait out a few years.”

Buying property is a big decision and a long-term commitment. Chothia highlights that many retirement funds have benefit counselling services to help you understand the pension-backed home loan benefits you have with your retirement fund.

Before committing to investing in property, always speak to a qualified financial adviser to make sure this decision will benefit you on your journey to financial success,” he concludes.