By: Heetal Govindjee
In a country where affordability remains a challenge for millions of people who aspire to own homes, Pension-Backed Lending may be a unique pathway for people and families looking to make their dream of owning a home a reality.
Pension-Backed loans are an alternative form of housing finance where an individual uses their pension savings as security for a mortgage loan. This kind of mortgage loan is regulated by strict laws, but it is an option for many individuals who have saved up substantial retirement funds.
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.
Here are some of the key considerations:
Collateralisation: In a pension-backed loan, the pension fund serves as collateral for the mortgage. This means that the borrower's retirement savings are used to secure the loan. An agreement must be in place between the bank, the Pension Fund, and your employer before you can apply.
Loan amount and eligibility: The loan amount you qualify for depends on how much you have saved in your retirement fund. The allowed maximum benefit as per the Fund rules and your ability to repay your loan is guided by the National Credit Act. Lenders may also consider the borrower's employment stability and the likelihood of continued contributions to the pension fund when approving such loans.
· Repayment structure: Repayment terms may vary, but typically, repayments are structured to align with the borrower's employment and retirement timeline.
· Risk: Borrowers should carefully consider the potential risks involved in using their pension as collateral. If you are unable to keep up the repayments, it could impact your retirement savings and financial security.
It is crucial for individuals considering a pension-backed loan to thoroughly research and understand the terms and conditions associated with such loans to make informed decisions based on their unique financial situation and goals.
* Govindjee is the head of personal lending at Standard Bank.
PERSONAL FINANCE