Pension Backed Home Loans Understanding the product it s issues and solutions
What is a Pension Backed Home loan? Why was this product necessary? Purchasing of a home Buying land Building a new home Home improvements Renovations Alterations Maintenance Secured by the member s Pension/Provident Fund in terms of section 19(5)(a) of the Pension Funds Act of 1956
When did this product surface in South Africa? & Who offers this product?
Who uses this product? Originally targeted for Unbankables I have a strict budget and don t have much money, so I send concrete and bricks home with the money I loaned through my pension Fund..and I will build my dream house in my ancestral land...i have already built the foundation and two rooms! -Member
Pro s of Pension Backed Home Loans No debit order fees Often a better interest rate No registration fees No legal fees
Negatives of Pension Backed Home Loans You could get a better rate directly with your own Financial Institution If the member defaults the tax implication on the Fund is negative - seen as a withdrawal Lack of preservation if a member defaults Fraud by the member not using the loan for correct purposes
Who are the Stakeholders in the process? A. Fund Makes the decisions, chooses the service provider Decides on the check and control mechanisms B. Employer Can support the process by insisting on Fund education for members, supporting application process by providing access and counselling C. Financial Institution Has to make sure the loan is affordable Manage data
Service provider checklist Service your members on a national bases Produce references from existing funds Follow all legislation / legal requirements Tailor made Management Systems Quarterly statement to members Comprehensive reports monthly to payroll and Funds Competitively priced and does not increase rates / fees annually (excluding Reserve Bank interest rate adjustments) Dedicated collections department for pension fund Backed Housing
How does the Pension Backed Home loan work? Board of Trustees make a decision Agreements signed with Employer(s) Appoint a Financial Institution Administration process Complete application form with the member ensuring all documention is in place If married in COP application form signed by spouse Completed documentation is logged by consultant Affordability check as per NCA by Financial Institution Once approved Fund Administrator checks surety value, makes sure no previously settled loan by the Fund Member receives the payment Bank owns documentation Fund initiated checkpoints are put in place Data management with Fund and Bank
What do most Financial Institutions use to check affordability? Affidavit (this is optional) Affordability check: In line with the NCA and Institutions policy Evidence that it is a primary residence: Payslip Rates Bill Municipality Tribal Leader (this is in dispute in some instances)
Why would the pay office not pay over monthly instalments to the Financial Institution? Members died settlement value Members absconded no income Employer is threatened no deduction made Members ill unpaid sick leave, no income
Members perception saving plan, not a retirement plan It s my money! I won t live long enough if I don't have a place to stay warm and dry, who cares about old age, I need to survive today! I have saved and budgeted so that my children got the best education..they are now working and it is their turn to take care of me! I am sick, when I die I am not going to get my money!
Case Study You have granted a Housing Loan should your Fund do an inspection? Lets create two points of view: Pro Inspection Why is this a good idea How would you do it? Anti Inspection Why is this not a good idea? What are the issues your group identified?
Inspection of the Property Who in the Fund does the inspection? Who pays, does the applying member pay or the Fund (all members) subsidise this expense? When do you do the inspection? What about out of town structures? What do you do if member has lied? What do you do if you uncover fraud? Who pays for legal action? Tips and ideas: Calling their bluff Independent inspector
Has this product been given a bad name and if so is that fair? Indiscriminate housing loans offered with minimal qualifying criteria Insufficient controls and management Reduce retirement preservation NCA has reduced this and the average acceptance rate of a loan is approx 45% This frustrates the member it is my money I want it!
Solutions Financial Institution could utilize to assist members regarding affordability Debt Consolidation through financial institution, base income figure is adjusted to enhance affordability, making it possible for the member to qualify for the loan. Applying through the Fund may reduce Bond interest rate.
Risk Cover To have or not to have Pro s Con s In the event of a member death or becoming permanently disabled, the members fund values are unaffected Additional cost to member
What are the trends? Loan values are going up - on average by 40% - Why is this the case? Used to be an old person benefit - More and more young members using benefit to establish themselves Members aren't building out of their pockets as building/renovation costs have gone up so much in the past four years. They are using this benefit.
Any Questions?
Thank You Presentation by Zsofi Fouche Sash Consulting (Pty) Ltd