By I-Net Bridge, From the Times
Pension Supported Housing Loans could provide a shield for consumers from further rate hikes, according to Pieter Vorster, General Manager: Pension Supported Housing Loans at Absa.
"In an increasing rate environment, as we have seen in South Africa over the past few years, Pension Supported Housing Loans (PSHL) offer some unique advantages to consumers needing housing finance. Unlike conventional loans such as personal or microloans, the rate of interest on a PSHL doesn't automatically rise when the prime lending rate does," says Vorster.
PSHLs offer two payment options, the one being a variable monthly instalment based on the applicable interest rate and the other a fixed monthly instalment. In the case of the latter option, the monthly repayable figure remains fixed - it is rather the term of the loan, usually originally set at ten years, which can be extended. The term of the loan is set by the pension fund trustees.
"This means that this class of borrowers doesn't feel the pinch to the same extent as if they had traditional credit finance.
"Although retirement fund trustees have a say in determining whether or not a PSHL can be extended, the general principle of extending the loan occurs automatically.
"This means that when this option is chosen PSHL borrowers need do nothing if and when interest rates rise the term of the loan will be automatically extended, monthly payroll deductions will remain the same and the borrower does not have to compromise in other areas of his life."
According to Vorster, this principle is one of the core philosophies behind the NCA which aims to prevent consumers from falling into debt-traps and a nasty spiral of having to service increasing monthly debt.
"PSHL borrowers not only have the advantage of being able to extend the term of their loans but they also tend to get preferential interest rates compared with what they would normally be offered by a banking institution or micro lender.
"With PSHLs the interest rate could be as low as prime less 2% as the rate is determined according to the retirement fund profile, rather than on a risk assessment of the borrower. There are other smaller cost advantages such as no bond registration or initiation fees," says Vorster.
"PSHLs," he adds, "are overseen by retirement fund trustees who have a fiduciary responsibility towards members and their best interests at heart. This contrasts with the objectives of other lenders who wish to maximize their returns as a priority."
Pension Supported Housing Loan (PSHLs) are loans offered to members of a pension or provident fund for the purpose of buying or building a house or making improvements to an existing home. The advance has to be used for a "permanent structure", so shacks and other forms of temporary accommodation do not qualify.
The loan is offered against the security of a certain percentage of the member's available post-tax withdrawal benefit in the retirement fund. The percentage is determined by the rules of the fund and by how much each member can afford to repay every month.
A percentage of the member's share in the retirement fund is used as collateral security for the PSHL. The tangible asset, being the house, is not used as security so will not be lost in the case of loan default. The retirement fund guarantees the loan but if the member leaves the fund before the loan is repaid the outstanding balance must be settled.