If you have been saving in your employer-sponsored retirement fund for a number of years, you may be able to use your pension savings to secure a loan to buy, build or renovate a home.

Access to a so-called pension-backed loan depends on your fund and the arrangements your fund’s trustees have put in place. 

If your trustees have provided for pension-backed loans you can even use it to supplement a home loan you get from a bank in cases, for example, where your bank won’t lend you enough to cover both the property or building and the fees, or you want to renovate and can’t borrow more on your traditional home loan.

But the key thing is you have to be able to afford the repayments and the interest as pension-backed loans are repaid from your salary typically by agreement with your employer to deduct and pay over what you owe each month from your pay. 

Your retirement savings will only be used to repay the loan if you default on the loan repayments or leave your employer before repaying the loan. If you default on an ordinary loan, the lender can attach your house, but with a pension-backed loan, if you fail to pay after being notified of what you owe, your retirement savings can be attached and used to pay the loan.  

Depending on the rules of your fund, the fund may either lend you the money itself, or it may furnish a guarantee to a bank or some other financial institution that grants you a loan. 

Whether your fund or a financial institution lends you the money, the lender must be registered with the National Credit Regulator and must comply with the National Credit Act. That means checking your income and expenses to ensure you can afford to repay the loan.

Borrowing from your fund

Only a few retirement funds lend you money for property or a home directly from their investments, but this can be a better option because the interest you pay boosts your retirement savings.

Some funds take the money from your own account and you pay it back with interest into your own account, David Hurford, director of marketing and consulting at Fairheads Financial Services, says. Fairheads provides the loan administration for funds that wish to offer such loans.

Other funds lend you money from an allocated portion of the fund and the repayments and interest benefit all members, he says.

The Pension Funds Act obliges funds to charge a minimum interest rate of the repo rate plus 2%. The repo rate, the rate at which the Reserve Bank lends money commercial banks, is currently 6.5%.

A fund guarantee

Most retirement funds that facilitate pension-backed loans do so by providing a guarantee to the bank. The bank lends you the money and earns interest from the loan, while the fund provides a guarantee that if you default your savings can be used to settle the loan.

First National Bank and Standard Bank provide these kinds of loans through agreements with the fund and the sponsoring employer.

Mfundo Mabaso, the head of growth at FNB Home Finance, says you may get a better interest rate on a pension-backed home loan than on an ordinary home loan because there is less risk for the bank. 

Mabaso says the interest rates on traditional home loans secured by a bond are between the prime rate plus 2.5 percentage points to prime minus 1.5 percentage points, but the lower rate is only if you have a very good credit profile. 

Pension-backed loans are available from prime plus one percentage point to prime less 1.5 percentage points, he says. 

Zanele Mbere, the head of personal lending at Standard Bank, says the interest rate offered to fund members is based on the financial health of the actual fund as well as the number of members. It is not an individual rate as is the case with an ordinary home loan. 

Mabaso says the fees on the loan may also be cheaper than a traditional home loan because there is only a once-off initiation fee and an ongoing monthly administration fee. There is no need for conveyancing fees to register the loan against the title deed.

Mbere says the initiation and administration fees are generally lower than those on an ordinary loan.

How much can you borrow

The Pension Funds Act limits how much you can borrow, depending on whether you secure the loan with a mortgage bond or use your retirement savings as a guarantee or both.

If you are using your pension savings, the Act limits the loan to the value of your savings less any tax that would be payable if you withdrew your savings.

In practice, funds, banks and other lenders typically only allow you to borrow 60% of your savings in the fund, Hurford says.

You must be at least five years away from retirement. 

If you are retrenched, dismissed or resign, you must either settle by taking a new loan or using your retirement savings. 

If your savings are used to settle the loan or if you default on the loan, the money taken from your fund will be treated as a withdrawal and you may have to pay tax. Mbere says for Standard Bank default means your arrears are greater than the value of four repayments.

Using your savings to pay off the loan will reduce your monthly pension so try to pay off the loan during your working years.

If your fund does not offer one of these loans, ask your trustees to set up such an arrangement.