Over the years we’ve seen an increase in the number of solutions made available to clients to enable them to delve into property ownership or to efficiently leverage their properties for their wealth creation journeys. Options such as the Pension backed loan, which is a loan that is secured against a portion of the value of your pension fund, offers an alternative property-financing solution with several beneficial applications for one to consider tapping into.
Although Pension-backed loans are not new to the market, they’re often misunderstood and their value as a property-investment tool is often underutilised.
Hayden Giger, Private Product Head at FNB Home and Secured Lending, says “The first misunderstanding of the solution that we see is that people think that taking out a pension-backed loan actually means withdrawing cash from a pension. This is not the case: the pension acts as collateral and is untouched so long as the loan is successfully repaid. It continues to accrue interest and dividends as before.”
The second misunderstanding relates to the uses to which a pension-backed loan can be put. You can use it for home improvements such as renovations, maintenance, alternative-energy solutions, settling a home loan, and/or paying costs associated with registering a new home loan.
The renovations, extensions and improvements that a pension-backed loan can be used for must be permanent or semi-permanent components of the property, as Laurie Gallagher, Product Manager for Pension Backed Lending, FNB Home and Secured Lending explains. “A useful rule of thumb is that if you were to physically pick up a house and shake it, anything that didn’t fall out would be covered by the loan. So, for example, you could use the loan to install water tanks, a solar energy system, or for extensions, improvements, or renovations. But you couldn’t use the loan to buy furniture or kitchen appliances – although an oven, if built in, would be covered.”
Additional constraints include the fact that the property has to be a primary residence, and that it must belong to either the homeowner or their direct dependants. “So, if you wanted to buy your child dependent property, you could use a pension-backed loan to assist,” Gallagher adds. “But if you wanted to do the same for a parent, you’d first have to prove that they’re 100% dependent on you. Remember that it is possible to have more than one primary residence – for example, if you live in Cape Town but work in Johannesburg, you might have a residence in each city that qualifies as primary.”
A pension-backed loan could also be used to fund the costs of the purchase of the home itself, which is particularly useful if an applicant has strong cash flow but is not cash flush – and could therefore qualify for a standard home loan but still lack the cash to pay for transfer costs or initial renovations. These up-front expenses could appropriately be covered by a pension-backed loan.
With that said, pension-backed loans are dictated by the amount one has in a pension fund and their affordability; they are useful across various income segments. In addition, the interest rate associated with a pension-backed loan is related to the risk rating of the underlying pension fund, it is possible, under some circumstances, to receive a lower rate on a pension-backed loan than on a standard home loan – although this is highly individual.
“Another possible application for pension-backed loans is to fund the purchase of a property on communal land, since bank bonds don’t cover these properties,” Giger explains. “South Africa would love to see more people in homes that they own – and rightfully so. Pension-backed loans are another mechanism that allows certain applicants to do so.”
But, as Giger cautions, though there are some good applications for pension-backed loans, there are also situations in which they should not be used. “Most importantly, they should not be used to pay down other debt. In fact, this would be in contravention of the law.”
Pension-backed loans are offered via a three-party agreement comprising a pension fund, a bank, and an employer. Applicants will need to have been employed for more than a year and will qualify for the loan based on their ability to repay it. The criteria determining who can apply for a pension-backed loan, under what circumstances, and for what purposes, are defined by the National Credit Act, 2005.
If you would like to find out more about whether a pension-backed loan is available to you, and under what terms, first speak to your employer’s human-resources department, your bank and your pension fund.
Visit our website on www.fnb.co.za for more information on this solution.
INFO SUPPLIED.
