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Your retirement savings could be the key to owning a home

By Athenkosi Sawutana

Many people would love to become home owners but don’t know or have the means to do so. However, there are many ways, and one of them includes using your pension or retirement savings to secure a home loan.

Tip: Use our home loan calculator to work out the size of loan you can afford.

According to Mfundo Mabaso, home finance growth head at FNB, you can use your retirement savings to access funds secured by your pension to renovate, build or buy a home, or even to cover the costs associated with the registration of a home loan. This is called a pension-backed home loan – meaning that you’re using your pension or retirement fund as collateral to secure a home loan.

How does it work?

When you take out a home loan, the bank wants to be sure that you will be able to pay it back. To ensure that you don’t default, the bank will retain ownership of your asset. If you default, the bank will use that asset to pay the remaining amount of the loan. If you’ve been contributing to a pension fund for a number of years, you can use your savings as collateral to take out a home loan.

The banks will not take money from your savings. Your pension savings will remain intact and you can continue with your monthly contributions, and you’ll receive funds when you retire. However, if you default on your loan, those savings will be used to pay off the home loan.

The bank will only lend you an amount that is equal to what you’ll receive when you retire.

Who qualifies for a pension-backed home loan?

According to Mabaso, not all pension funds provide this benefit. He says for you to qualify, you must be part of a pension fund that allows for this benefit, and further have an agreement in place with your bank. In addition to this you must be employed so that you’re able to pay the monthly instalments.

What are the benefits?

“Pension-backed home loans are competitively priced (sometimes lower than a mortgage),” says Mabaso. 

This finance option can be used on land that is not titled (tribal authority land) and the application process is quicker than for a mortgage, adds Mabaso.

The loan can be used with a mortgage loan when you don’t have a deposit and with the Finance Linked Individual Subsidy Programme (FLISP).

READ MORE: How to secure a government housing subsidy

Be aware of the disadvantages

Mabaso says the pension-backed home loan amount is limited to the pension fund. Your loan amount cannot exceed your withdrawal benefit.  

Secondly, if you resign from the fund or employer, or default, you’ll pay tax because the money will be treated as a withdrawal.

Lastly, using your pension as collateral reduces the amount you receive on your retirement if you default. This makes it difficult for you to enjoy the kind of retirement you planned.

We can help you renovate your home with a loan of up to R250,000. Fill in this form and a consultant will be in touch.

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