Pension backed home loan

Fairheads innovates with new home loan product

February 2018

By David Hurford, Director: Marketing & Consulting, Fairheads Benefit Services

The housing crisis in South Africa is a complex problem, inherited by this generation from our past and still unresolved. Ownership of a property, setting roots to the land and a home to live in are fundamental to a strong, vibrant and stable society. Home ownership is, arguably, one of the first steps to economic freedom in that it provides a safe place to live and store possessions and allows an accumulation of wealth through equity in the property – something which can be leveraged to pay for health, education, and other critical needs of which many South Africans are deprived.

Purchasing a house unfortunately remains out of reach for too many of us and new and creative ways must be found to end this cycle. Fairheads wants to be a part of the solution and has developed a loan product which is designed to make property ownership more accessible and affordable.

Pension-backed lending schemes are not new and many banks and other financial intermediaries have served this market. The Pension Funds Act allows members of a retirement fund, subject to the rules of the fund, to use their pension fund credit as security for a loan. The loan must be used to purchase or renovate a home, or can be used to clear an existing debt which was used for this purpose. There is a limit to the amount that the member can borrow against their retirement fund credit, usually around 60% or 70% (but no more than 90% as prescribed by the Act).

The theory behind these schemes is and has been that the lender’s risk is significantly reduced and the borrower should be compensated with a reduced interest rate. In reality, this has not always proved to be the case, with banks providing meagre reductions to their carded rate.

Simply put, the banks have been charging a margin, sometimes quite significant, on loans which are relatively low risk. In addition, there are often high transaction and set-up fees associated with the loans.

A new approach

Fairheads’ approach is different. As an independent administrator, we have partnered with the retirement fund to provide loans directly to its members, effectively disintermediating the banks. The retirement fund lends the money to its members and the loan is administered by Fairheads. This provides the member with a very competitive interest rate, and the interest that they are paying is actually returned to their retirement savings.Fairheads provides the administration services to the fund at a significantly lower cost than many of the banks.

The Fairheads home loan product can also be used in conjunction with a standard housing loan if the property price exceeds what is available in the member’s fund credit.

We are tremendously excited about the benefits of this new product. It has the potential to unlock real value for retirement fund members by providing them with the opportunity to purchase their home, something we believe is essential to growing wealth, stability and happiness.

Please contact David Hurford, Director: Marketing and Consulting, at david@fairheads.com

Published in Fairheads Times, February 2018