Personal Finance | Should you use your pension as collateral for a home loan?
When you apply for a home loan, the bank will consider the property as security for the loan but will also look at your risk rating. In some cases, the bank will require someone to sign surety, especially in the case of a 100% mortgage. This is where pension-backed lending can become an important financial tool.An alternative form of housing finance where an individual uses their pension savings as security for a mortgage loan.
It is important to note that this is not the same as drawing down on your pension fund. You still have the full loan to repay, and your pension fund remains intact. Only if you default would the bank have a claim against your pension fund.Govindjee warns that considering a pension-backed loan is a significant financial decision, so it is important to carefully evaluate various factors before taking up this type of home finance.
There are also limits in terms of your monthly repayments: some banks may limit the monthly instalments to no more than 25% of your monthly income.Normally, when applying for a home loan, rates are based on a client’s credit risk profile. In the case of a pension-backed loan, favourable interest rates and fees are negotiated at a pension fund level, meaning that all members of that fund will enjoy the same rate. For some employees, that could mean a better interest rate and lower fees.
Alternatively, you could request your fund to settle the loan in full, from your withdrawal benefit, on your termination of your membership. This would affect your future retirement funding.Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
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