Dipping into your retirement funds to take care of your housing needs is bad news.
The enticing interest rate that you pay for a loan from your retirement fund can be as low as 15 percent, which is below the base mortgage bond rate of 16,5 percent, but you should be aware that you can lose out big time in investment returns on your pension money.
And if you are a member of a retirement fund that does make housing loans available to its members, you should ensure that you are not cross subsidising the members who have taken loans.
Administration costs and the rate at which the loan is repaid by those who take loans should be for those members' account only.
Deon Smith, business development executive for Old Mutual Employee Benefits, says retirement funds are under pressure from members to finance housing needs.
The objective of a retirement fund is to provide you with benefits when you retire or withdraw from the fund, or to provide benefits for your dependents when you die.
The Pension Funds Act does give you access to the money accumulated in your retirement fund if the rules of the fund allow this. But you may only use it to buy a new house, make improvements to an existing house or buy land and build a house.
Another condition is that you or your dependants must occupy the house and that the amount you borrow must be repaid in equal instalments over 30 years.
You can use your retirement fund to finance a home in three ways:
* You can take a loan directly from the fund which you have to repay at 16 percent interest;
* You can use the value of your fund as security for obtaining a loan from a bank; or
* You can ask your fund to negotiate a special interest rate with a bank for fund members.
The way in which a fund is registered will determine if it can grant you a loan or give you a guarantee for a loan instead.
Johan Roux, senior manager at Sanlam Employee Benefits, says in general retirement funds, at around 20 percent, show higher returns than the rate at which members repay loans - 15 percent. This is the minimum interest that can be charged under the Pension Funds Act.
Losing out on five percent interest a year on your retirement funds can mean substantially less money for you when you retire or withdraw from a fund.
When the fund only acts as guarantor for your loan this reduces the administration costs and business risk to the fund and returns are not affected.