By Brett Ladouce
It is estimated that South Africa has a formal housing backlog of about two to three million housing units. That equates to about 10 million to 12 million South Africans who want to move out of informal settlements and backyard dwellings to a house they own and can call home.
To make things worse, the government has replaced its long-standing programme of building houses, with a site-and-service model where only serviced land will be provided to recipients who then have the responsibility to fund and build a house on the land. By Brett Ladouce
It is reasonable to deduce that a large portion of South Africans without formal housing ownership are hard-working, salary-earning, retirement fund members who are not able to obtain financing to build or buy a house without some assistance. The Pension Funds Act empowers retirement funds to provide such assistance to their members.
Under the Pension Funds Act, a retirement fund may, if its rules permit, invest up to 65% of its assets in home loans to its members. The fund may grant a loan to a member or furnish a guarantee to a home loan provider of up to 65% of the member’s fund value to enable a fund member to:
- Repay an existing home loan granted to the member.
- Buy land on which a house has been or will be built for the member or their dependants to live in.
- Make additions or alterations to or to maintain or repair a house.
The home loan or guarantee must be secured by a first mortgage, a pledge by the member of their after-tax withdrawal benefits or both a first mortgage and a pledge. Most banks will provide a home loan to a fund member who can provide a first mortgage and a pledge. This is because the security offered for the loan then far exceeds the loan value. If you buy a R1 000 000 house, you will provide the bank with security in the form of a mortgage of R1 000 000 plus an additional guarantee from your fund of R650 000 (assuming that your fund value is R1 000 000). This means that the bank has R1 650 000 in security to secure the risk of the R1 000 000 home loan that was made to you. The fund guarantee therefore lowers the risk of the bank and the interest rate that you pay to the bank should reflect the decreased risk.
A lot has been written about the two-pot system that kicks in on March 1, 2024, but little has been written on the effect it will have on home loans or home loan guarantees granted by funds. The two-pot system should reduce the risks associated with home loans that are based on fund guarantees. It will reduce the risk of the loan repayment being triggered every time a member leaves one employer to start working at another employer. As members will, in future, no longer have access to the retirement pot when they change jobs, the bank is not in danger of suffering a loss if the bond is not partially settled when an employee leaves the services of their employer. Where the retirement pot is transferred to the fund of the new employer, the new fund can accept the transfer of the retirement pot, subject to the transfer of home loan liability, by issuing a guarantee to the home loan lender as well.
Where home loans are continued and the new fund replaces the guarantee of the old fund, an income tax liability is not triggered. If the bank triggers repayment of the home loan (and the R650 000 becomes payable by the fund) when a member leaves their fund, it will trigger a lump sum withdrawal benefit of at least R800 000 and a tax liability of at least R150 000. If the guarantee repayment is not triggered, the new fund will grant a guarantee for R650 000, and the member will continue to make the loan repayments without taking a lump sum withdrawal benefit from the first fund and thus losing R150 000 to tax.
Fund members can therefore use the two-pot system to build value in their retirement pots and 65% of the value of the pots can be used as a guarantee for a future home loan. The table illustrates how a member who starts to work on March 1, 2024, with an annual income of R300 000, can build their retirement pot over time as an asset that can be used to provide a guarantee for a home loan if they contribute 27.5% of taxable income to the fund (R55 000 per year to the retirement pot) and the fund investment growth is 10% per year. Assuming that the member withdraws their whole savings pot each year, after five years, the member will have about R240 000 in the fund to offer as a home loan guarantee. The amount goes up to about R626 000 after 10 years and about R 2 252 000 after 20 years.
Retirement funds can play a vital role in securing the most comprehensive retirement outcomes for members by focusing on the benefit amount that is available at retirement and reducing the living costs after retirement by ensuring that members own a roof over their heads and do not end up spending most of their annuity income after retirement on home rental expenses. Lump sum retirement benefits, assuming that the savings pot is not empty at retirement, must also not be spent on constructing a retirement home for fund members when they retire.
Before you buy or build a home, first find out if your retirement fund can assist you with a home loan guarantee against the money in your retirement pot that might put you in a better position to obtain a home loan from a bank.
* Ladouce is a pension funds lawyer and the author of “Pensions for Palookas”