JOHANNESBURG – At least three of the big-four South African banks allow clients to use their pension fund as security for a home loan, offering an alternative to the traditional home loan agreement.
First National Bank said it has been doing this for over three years via its Smart Housing Plan initiative and has offered over R1bn worth of loans to finance houses on the back of pension as security.
Standard Bank (JSE:SBK) said it has been in the game for 15 years and negotiations on pricing and the structure of the deal are tailor made. The contract is determined by the board of trustees of the retirement fund and Standard Bank. Absa (JSE:ASA) said it also had a similar arrangement called a pension supported home loan and had been offering this since mid 1990s. Nedbank (JSE:NED) seemed not to have this offer.
FNB said the value of a house that it financed was determined by the pension funds, but typically it funded up to 80% of the after tax value of the clients accumulated pension fund.
Pieter du Toit, FNB’s CEO of smart loans said the bank had loans of up to R1m and the average loan size was R50 000. He said the bank was advancing about R35m per month in loans backed by pensions.
Absa Home Loans Managing Executive Sifiso Shongwe said loan sizes were determined by specific fund rules. This included the percentage of the fund benefits allowed to be used as security for the loans.
“Each fund has its own rules around this but generally a minimum loan size of R5 000 is pre-determined by the fund principals. After taking the percentage rule into consideration the remaining benefit amount can be used as a collateral security for a loan,” Shongwe said.
The pension was also used as security by people who want to renovate or build a house, especially those who could not qualify for a home loan. Du Toit said the loan needed to be paid during one’s working life so that there was no debt at retirement.
“Loan terms will not exceed retirement age. We want you have to have your full pension … As the pension is the security for this loan, should a member change jobs then the pension will first settle this loan and the rest of pension will then be for the member,” Du Toit said.
Du Toit said the typical interest rates on loans backed by pension ranged between prime minus 1% and prime +1%. Currently prime is sitting at 9%.
Even at Absa the home loan backed by pension cannot exceed the term of retirement. The loan needs to be settled at retirement, Shongwe said. He also pointed out that when moving between employer/funds the member must settle the loan from his existing benefits.
In order to qualify for the pension backed home loan, one needed to be 18 years old and the pension fund needs to have contracted with FNB. So a potential client would require a payslip, pension benefit statement and proof that the money is going to be used for housing.
At Absa you need to be a full time employees contributing to a retirement fund. The fund and employer must have signed a surety agreement with Absa and affordability and credit worthiness was also taken into consideration
“An applicant will require sufficient equity/ fund benefits over the term to be used as collateral security so age is not a direct determinant.
Asked how FNB protected itself if the pension fund was underperforming, the bank said it relied on the investment regulations governing pension funds and also evaluated a pension fund’s investment policy.
“We also provide life cover, so should the member die the loan is settled and the pension is again not affected (most pension funds insist on this cover). The pension fund security is mostly needed if a member resigns and some loan amount is still outstanding,” Du Toit added.
Absa’s Shongwe added that his bank performed annual reviews of funds (actuarial reviews and financial assessment). Exposure management principles were also applied in the management of all schemes.