Pension Secured Loans

Pension secured loans are loans that are secured or backed by the accumulated pension or savings of the provident funds for retirement for an employee. The proceeds of the loans can be used for purposes of renovating, upgrading or purchasing a dwelling that is the primary residence for the member. Basically, these loans enable members of a retirement fund scheme to finance their homes without using a mortgage bond. Getting these loans does not mean that the member’s provident or pension fund is depleted after applying for the loans. It simply means that in case the member fails to pay for the loans, their savings will be used in settling them.

Who can benefit from pension secured loans?

The basic requirement for these loans is to be a member of a pension scheme. The other requirements set by different lenders vary. However, employees with sufficient collateral in form of their withdrawal benefits for retirement fund as well as those capable of making monthly repayments can apply for these loans. Nevertheless, most banks require an agreement between the bank, the employer and the provident or pension fund to be prepared before the loans are availed to the applicants.

How the loans work

Once the applicant signs the agreement mentioned above, the employer confirms, then they agree to ensure that the agreed monthly deductions are made for the repayment of the loans. Usually, the deductions are made from the wages or salary directly via the payroll of the company or the employer. This means that the employee or the employer does not have to worry about making repayments late. It is important to note that it is rare to secure a 100 percent bond which means that the loans might appeal to young home buyers. In most countries, regulations allow lenders to loan retirement fund’s members up to 90 percent. However, there are different loan limits depending on the designated limits for the fund and the repayment limit. However, it is vital to know that not all pension funds offer these loans. Therefore, confirm with your employer first.

Pros and cons of pension secured loans

Advantages of pension-backed loans include:

• Some banks allow borrowers to have separate accounts for pension-backed loans and for bond.
• The loans can be paid off at varying rates.
• A married couple can use the pension fund of their spouse or theirs.
• Interest rate for home loans are likely to decrease as the loans’ risk decreases.
• Some banks give waive fees such as bond registration, initiation as well as the fees for property valuation.

Cons

Among the disadvantages of these loans include:

• If you default the loans, it means you are putting pension fund in danger because the pension fund or scheme will have to settle your loan balance.
• For young members of a pension fund, the retirement value can be low, affecting the level of granted guarantee.
• You can tie yourself down to a company since if you opt to change your job, you will have to settle your pension backed loans.

Why people are taking pension secured loans

Proponents of these loans see them as a major, integral part of the housing finance of the private sector. They argue that the loans offer low income earners a chance to release the equity that is “trapped” in their provident or pension fund and use it in satisfying their immediate housing requirements. They also see it as a means of creating wealth on long term basis. However, there are others, who see this as the initial step towards putting the retirement savings of individuals at risk, compounding the burden of the state of providing social support to the aging population.

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Sources

http://www.housingfinanceafrica.org/wp-content/uploads/2009/06/Pension_secured_loans.pdf

http://www.standardbank.co.za/standardbank/Personal/Borrowing/Home-Loans/Building-my-home/Options/Pension-backed-lending

http://www.destinyconnect.com/2015/08/31/pros-cons-pension-backed-loans/