Pension Backed Housing Loans – how do they work?

Pension Backed Housing Loans (PBHLs) have become
a very important part of the pension fund industry as
they give members the chance to use their pension
benefits/savings (fund credit) to buy immovable property
such as houses, flats, apartments or land, or to make
renovations to their homes. PBHLs have become popular in
Namibia and are mostly being used for home improvement
projects (i.e. renovations), rather than for buying new homes,
because the size of the loans can be small. Do members of
pension funds really understand how PBHLs work?
In order to provide members with more information, in this
issue we discuss the following:
1. Laws and purposes of these loans;
2. Conditions for a loan to be granted;
3. Types of PBHLs;
4. Practicalities;
5. Some important considerations; and
6. Observations by the Regulator.
Laws and purposes of these loans
PBHLs are allowed and managed in terms of Section 19(5) of
the Pension Funds Act of 1956 (Act no. 24 of 1956) (“the Act”).
The Act states that a loan that is given to a member through a
pension fund, is an investment made by the fund in the member
to enable him/her to: –
Pay-off or settle a loan that’s been granted to the member by
another party, such as a bank or building society, for immovable
property. Immovable property refers to assets such as houses,
flats, apartments or land on which a house or a flat or an
apartment will be built;
Buy a dwelling (which is another word for a house, a flat or
an apartment etc.) or land on which it’s expected that a dwelling
will be built by the member or his/her spouse; and
Make renovations, additions or alterations to the member’s
existing house.
This means that the Pension Funds Act allows funds to give
loans to its members, but only for the reasons given. When a
member applies for a PBHL, s/he must know that it must be
repaid to the fund. These loans are given for housing purposes
only and may not be used as a way to allow members to abuse/
access their retirement benefits early. These loans must be
repaid in full by the time the member retires so that the final
retirement benefit is replaced to its full value. It must be noted
that the Board of Trustees of a fund have a responsibility to
prevent or report any abuses of these loans to NAMFISA.
Conditions for a loan to be granted
A member can be given financial assistance in the form of
a “direct loan” from a retirement fund or a guarantee (i.e.
“indirect loan”) to secure a third-party loan. A guarantee is a
promise by the fund to pay for your home-loan if you fail to pay
it yourself. Direct and indirect loans are allowed only if:-
1. The property belongs to the member or to his or her spouse;
and
2. That the house must be occupied by the member or the
dependents of the member.
3. The loan that you receive is not more than 90% of the value
of the property or 90% of the member’s savings in the fund,
whichever is lesser. So if the price of the house you want is
N$500,000 but you have only saved N$400,000; the maximum
loan you can get from the fund is 90% of N$400,000 which is
N$360,000.
Should the member be applying for a loan to buy land, the
member must have every intention to build a house on it, in
future, which will be occupied by the member and/or his/her
dependents. Circular no. PI/PF/3/2003 states that a fund may
not grant more than one loan to the same member at a time.

So if a member already owes the fund for a housing loan, s/
he cannot be allowed to get another loan. PBHLs can only be
granted for housing related costs and cannot be used for any
other purposes such as buying of cars, cattle or paying off living
expenses/bills. The loan amount must be repaid over a period of
not more than 30 years. The maximum allowed repayment term
differs from fund to fund, so please make sure you know what
the maximum repayment period is that your fund allows.
Types of PBHLs
A direct housing loan scheme is one where a fund grants
a member a housing loan directly from the assets of the fund.
Direct loans are granted to members (by a fund) which are
taken from the members’ savings in the fund. For example,
if a member has a fund credit of N$50,000 and s/he borrows
N$20,000 for renovations. This would mean that the members
benefit in the fund will be reduced by the loan amount and paid
over to the member which ultimately reduces the assets of the
Fund. The interest rate payable for such loans as prescribed by
the Act equals to the Namibian Prime rate plus 4%. At present,
the prime rate is 10.75%, which means a member will have
to repay this loan at an interest rate of 14.75% over the term
of the loan. On a monthly basis the employer will deduct the
monthly instalments payable for the loan from the member’s
monthly salary and these are then paid to the fund on behalf of
the member.
There are also funds that have implemented “indirect”
housing loan schemes for their members. Indirect loans are
housing loans granted by a third party usually a bank to a
member. The member provides his/her savings within the fund
as security for the loan. So should it happen that the member
fails to repay the loan or leaves the fund, the bank would call
on the guarantee issued to settle the loan and the outstanding
amount would then be taken from the member’s fund credit
before the benefit is paid out to the member should s/he be
leaving the fund. Similar to direct loans, on a monthly basis
the employer will deduct the monthly instalments payable for
the loan from the member’s monthly salary and these are then
paid to the third party (e.g. a bank or building society) on behalf
of the member. The interest rate for indirect loans are usually
linked to the prime rate, however, funds are able to negotiate
favourable rates with the bank.
Rules of the Fund
Should you wish to apply for a PBHL:
Firstly, find out whether your fund makes provision for such loans to be granted to members.
Secondly, if your fund does have a housing scheme, you need
to find out the amount members are allowed to borrow. Amounts
that members are allowed to borrow differ from fund to fund but
cannot be more than the maximum in the Act.
Some funds allow their members to borrow only up to 50%
of their savings, however,as mentioned thisdiffers from fund to
fund. For example, if your fund allows you to borrow up to 50%
of your fund credit for a housing loan and you have a fund credit
of N$200,000, it would mean that you may only borrow up to
N$100,000 for housing purposes.
Once you know the position, you will most probably be given
more information in terms of what steps to follow for you to be
granted a loan.
Usually a member will be required to complete a PBHL
application form as well as submit quotations for the work to be
done on the house or else a deed of purchase / sale agreement
entered into by the member and the entity selling them the
house or land. Should you want to renovate your house, you will
need to provide proof that the property belongs to you or your
spouse and that you, your spouse or your dependents live in it.
Some important considerations
Should a member decide to borrow money from his/her fund
for housing purposes, please check the latest value of your
current fund credit as well as read up on the rules of your fund’s
housing loan scheme so that you confirm that the maximum
allowable loan amount that you want to borrow will be enough
for whatever you want to do (i.e. to purchase a residence or
land or for renovations). Members are cautioned to carefully
consider the following before applying for a home loan:
Type of loan to apply for – A member needs to decide which
type of loan they wish to apply for from the fund. A member
should look at the type of loan that gives him the best benefits
for the best price. A member will therefore need to investigate
and find out what the interest rate payable is for each type of
housing loan before an application is made.
Affordability – Looking at your monthly and/or yearly budget
may help you understand just how much you can afford to make
in loan repayments, therefore helping you decide on a loan
amount and term of the loan that will suit you.
Make sure that you can afford the monthly repayments
throughout the loan’s term, especially if interest rates are to go
up. Remember that interest rates do not always stay the same
and if they are to go up, you will have to pay more for your loan
each month.
Additional expenses – In addition to the monthly loan
repayment, expenses such as travelling costs, school fees,
Pension Backed
Housing Loans –
insurance premiums to cover damages or loss to the structure
of the house, the cost of maintaining the house, municipal and
other costs such as rates and taxes, water, electricity, security
etc., all need to be considered. It is important for a member to
budget properly to lessen unwanted surprises.
Current financial situation – A member should always
consider their current financial situation before applying for a
housing loan. It is easy to apply for a loan while forgetting your
future plans such as getting married, the costs of taking care of
the baby that’s on the way or unexpected costs for events such
as death in the family or other loans that might put pressure on
you financially. You will have to look at your finances as a whole
and ensure that should you apply for a loan there is some room
for unexpected costs or living expenses.
Length or term of the loan – The term of the loan also plays
a very important part in determining the total cost of the loan
as well as the repayment amount you will have to make on a
monthly basis. Please note that the longer the term, the more
the loan will cost as well as the lower the monthly repayment/
installment will be. Should you choose to pay off the loan in a
shorter term/period, the cost of the loan will be much less than
that of a longer term. In addition, the shorter the term, the
higher the monthly repayment will be.
Interest rates – Members need to pay attention to current
interest rates as well as future expected movements in interest
rates.
Should the interest rate go up, the member’s repayment
amount will also increase thereby putting more pressure on
the member’s monthly income and spending budget. If they
decrease then the member’s repayment amount will also
decrease giving some relief to the member.
Observations by the regulator
Some abuses have come to the Registrar’s attention and
members are cautioned to please observe the law as the
Registrar will not hesitate to investigate and report any
abuses to the relevant authorities. Some of the abuses noted
include:
Members using PBHLs to settle loans that are for purposes
other than for housing e.g. settling of car and other debts. PBHLs
are not to be used for purposes other than that of housing as per
the Act. These loans must be used for housing purposes only. A
member is not allowed to use the loan to buy food, cars, livestock
or any other purpose. Neither should the loan be granted to a
member for speculation in the property / housing market when
the member already has a house or houses.
The awarding of PBHLs by funds to members for the
acquisition of holiday cottages or accommodation for children
at university. This does not conform to the purposes of acquiring
a house as envisaged by the Act. These loans must be granted for
genuine housing needs of the members; and
The granting of PBHLs by funds to members where the
properties concerned do not belong to the members or their
spouses or are not occupied by the member or dependents of
the member;
It must be noted that the regulator can and will use its
powers to bring civil action to the perpetrators so as to ensure
compliance.

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