A pension-backed home loan could be a possible solution if you’re looking for a way to finance alternative energy sources for your home.

Consumers are in a tight financial squeeze, with an increase in fuel prices in February, coupled with an interest-rate increase of another 25 basis points at the end of January.

Inflation eased slightly in December to 7.2% from 7.4% in November, however food and fuel prices were still higher than the targeted range for inflation.

This is on the backdrop of major strain on the power grid, with Eskom struggling with stable power generation. As a result, more consumers are considering energy alternatives to keep the lights on in their homes.

With the announcement by the National Energy Regulator of South Africa of an 18.65% tariff hike scheduled for April 2023, more consumers are looking for ways to make use of alternative power supplies and to get off the grid.

Could a pension-backed home loan be the answer?

A pension fund is permitted by the Pension Funds Act to lend a member an amount of money for the purposes of purchasing or renovating their home.

Although it is allowed by the Act, not all pension funds actually provide this benefit. It would need to form part of the pension fund rules, so if you are considering this option to help fund an alternative power setup, you would need to confirm with your employer first whether your pension fund allows it.

The Government Employees Pension Fund does not provide pension-backed loans, as it is a defined benefit fund and does not fall under the Pension Funds Act.

The amount of money that can be lent to the member is limited by the Pension Funds Act to 90% of their retirement funds, however individual funds have their own limits.

Usually, the pension fund would work with a specific bank to offer the benefit to their members.

The loan can be used to buy an existing home or to build a new home, settle an existing home loan or improve an existing home. The loan has to be paid back over an agreed period.

There are limits in terms of your monthly repayments: some banks may limit the monthly installments to be no more than 25% of your monthly income.

The installment is usually fixed in order to assist the employer in managing their payroll deductions. That means in the case of interest rate increases, the length of the loan would be extended.

The maximum period of a loan is usually 30 years or the length of time to your normal retirement age, whichever is lower. In other words, if you are 40 years old and your retirement age is 65, you could only qualify for a 25-year loan.

“A retirement fund is a benefit that is available to many employees across the country, says Ncumisa Madinda, executive for Member solutions at Momentum Corporate.

“We at Momentum Corporate want to help our members understand how they can use their benefits to better their lives now, however we would encourage them to reach out to their retirement benefit counsellors for advice.

“We also encourage members who want to go off the grid or have hybrid systems in their homes to make sure they speak to an expert about the correct solution for their household needs.”

Advantages

Some of the advantages of a pension-backed home loan are:

• No bond registration costs
• Low initiation and monthly fees
• Favourable interest rates
• Instalments deducted directly from the member’s salary, with no debit order fees
• Low risk of defaulting on the loan, as long as you’re employed and earning a salary

To qualify for a pension-backed home loan, members will have to go through the usual bank approval process, with the same requirements for supporting documentation.

Madinda says many retirement funds have benefit counselling services to help you understand the pension-backed home loan benefits you have with your retirement fund.

This article first appeared in City Press.