You can also listen to this podcast at iono.fm.
Download the free LiSTN audio app on Google Play, Apple, or here.
Simon Brown: I'm currently speaking with Tebogo Mphafudi, Business Development Manager at Momentum Corporate. Tebogo-san, thank you for your early morning. Pension-backed mortgages were frankly unheard of before as an alternative to traditional bank-funded mortgages. I think this is literally where you use your pension as collateral to secure a loan for real estate, a house, an apartment, or an apartment.
Tebogo Mufaffdi: yes. Good morning, Simon. It's an honor to be able to join you this early in the morning. you are 100% correct. This is a secured loan, some call it collateral, in this case the member's pension or retirement savings.
We know that when a credit provider provides some form of collateral for a loan, there are many benefits attached to that form of financing, such as lower interest rates.
Simon Brown: I'd like to touch on that in a moment. But first, traditionally, security is property. In some ways you're saying this is even better because real estate is expensive to sell. A pension fund is literally a pile of money sitting there.
Tebogo Mufaffdi: correct. So there is a perception that some members, for example, seem to think that when they provide pension-backed mortgages, the funds actually come out of the member's retirement savings, and perhaps that's the point. I think it's a little clearer now. I think it's good that you made it clear that it is essentially collateral for a loan.
We know how important it is to continue investing in your retirement savings so you can live comfortably in retirement. So, from that perspective, it's important to say that the security is still intact and that members will continue to have access to their investments and continue to grow. This is simply a form of protection for credit providers and to ensure that loans are provided at a very low cost for members.
Compared to traditional home loans, the real estate is naturally the collateral, but in this case, the member's retirement funds are simply held as collateral for the loan in case something happens. Yes, the credit provider can then take back the collateral. .
Read/listen:
Two-pot retirement system to be introduced in September
Which comes first: mortgage freedom or retirement security?
Can I borrow money from my provident fund under the new pension regulations?
Simon Brown: Is this an easier, faster, and perhaps cheaper process than a traditional mortgage?
Tebogo Mufaffdi: correct. As a result, many members are actually able to take advantage of pension-backed mortgages in conjunction with traditional mortgages. For example, let's say we have a member who wants to buy a property and the bank's loan amount may be less than 100% for him. The transaction may come with a down payment requirement, in which case the member can actually use an annuity-backed mortgage to cover the shortfall.
Similarly, [for] An important expense that is omitted and not discussed by many members looking to purchase real estate is the bond registration and transfer fees associated with any real estate purchase or most real estate purchase transactions. These can be very important, and we know that in our current economic culture, we won't have the savings readily available to cover some of these costs.
For example, if you are looking to buy a property worth R1 million, it will cost you approximately R50,000 to R60,000. Members will have to incur those costs somewhere to carry out that trade, and that's where pension-backed mortgage support may come into play to support the trade.
Simon Brown: I understand your opinion. And of course it costs him R50,000 or he R60,000 and probably another R100,000 or so as a deposit at the same time.
You said the rate was good. A 1% reduction in interest rates is very important. What better rates are you considering?
Tebogo Mufaffdi: That's a very good question. To give you a very practical example, we have a client who is looking to renovate. Pension-backed mortgage loans are also available for home renovations. Now, this client actually took out a personal loan to pay for those renovations. They took R50,000. [been given] The personal loan has a term of 7 years. Calculating how much he could save with a pension-backed mortgage, he got R50,000 at a 26% interest rate.
As an example, if you're considering a pension-backed mortgage, the worst-case scenario is that you're looking at the end of, say, prime plus 1.25%.
Now, if you look at the difference between a simple 26% and 13% loan over, say, seven years and look at R50,000, this member could potentially end up paying just under R400. monthly. However, at the end of the period, based on the interest rate, if we had used a more secure facility we would have saved around R30,000 in interest.
So it's just for show. Lending platforms exist, but you need to be a little more careful and intentional about the platforms you use and the savings you make.
Simon Brown: Saving R30,000 on a R50,000 loan is scary.
Duration? Mortgage loans typically last for 20 years or more. Do you think these periods are still going to be quite long?
Tebogo Mufaffdi: This particular product certainly offers flexibility. Members have a choice of time periods. Pension-backed mortgages are traditionally not originated beyond the member's retirement age. And the importance of that is that when a member retires, you don't want them to have a loan and be burdened with repaying it when they retire. They should really be at a comfortable stage in life.
Therefore, although the terms are flexible, the number of years a member must join is limited. [reach] retirement.
So, as an example, let's say a member has 15 years before retiring. That will be the maximum period you can take over the loan. But that's not the word they have to choose. As you know, the longer the term, the higher the interest paid by the member. However, the lower the installment and the shorter the term, the higher the installment but the less interest you pay during that period. So membership is flexible, based on affordability and a credit check that we carry out.
Simon Brown: Suddenly, we seem to have lost Tebogo. Leave it as is. Tebogo's line suddenly went down. That's his Tebogo Mphafudi, Momentum Corporate Business Development Manager.
This is an interesting idea. I'd like to dig deeper into this, but I'll leave it at that for now.
Listen to the full MoneywebNOW podcast here every weekday morning.