Warning for these South Africans trying to buy a home

Retired South Africans face major challenges or downright rejection when trying to secure home loans, as most lenders restrict terms to end by age 75.

For many South Africans, retirement means that major expenses – like student, car, and home loans – are finally paid off.

This brings significant financial relief at a time when most people need to closely monitor their income, which could be much less than it was while they were working.

However, not everyone is as fortunate, and those who have not bought a home in the lead-up to retirement face major financial hurdles.

“Banks and other lenders are reluctant to offer home loans to retirees because of a higher risk of delinquency,” said Sentinel Homes managing director Renier Kriek.

For wealthier South Africans who own more assets, the chances of securing a home loan are, naturally, higher. However, other South Africans face major obstacles when looking for a loan.

Most home loan providers operate on the rule that a home loan must be fully repaid before an applicant turns 75. That means they should apply for one before 55, or they’ll have to accept a reduced term.

For example, a 65-year-old retiree will only be granted a 10-year loan, resulting in much higher monthly instalments that could prove unaffordable. “You’ll end up paying 75% more per month than if you were, say, in your 40s,” Kriek said.

Banks also generally don’t fund retirees who only have pension income. Applicants will be subjected to rigorous affordability checks to prove they have a stable, active or passive income from an occupation or investments.

Kriek explained that this requirement ensures applicants can service the higher monthly instalments over the shorter term.

He added that retirees have a much harder time getting a home loan, if at all. This means that, in order to secure affordable terms, one really needs to apply before 50, so planning should start well before that.

“You have to think about how you are going to qualify for and service the debt when you either don’t want to or cannot work anymore,” he said.

Available options

According to Kriek, several options can help South Africans fund housing in their old age, either before or during retirement, and each has its pros and cons.

First, South Africans can decide to rent. Unfortunately, many landlords won’t take on retiree tenants because, if they become delinquent, South Africa’s restrictive rental laws make it almost impossible to evict the elderly.

Another option is for South Africans to use a portion of their pension to pay the deposit and instalments on a home loan.

However, this impacts their ability to service ongoing property expenses and their lifestyle over the long term. Withdrawals from pension capital may also come with tax implications.

Consumers also once had the option of cashing out their pension, but the current two-pot scheme makes this much more difficult since withdrawals are restricted to the amount held in the savings pot.

In addition, withdrawals are taxed on the spot at the person’s highest marginal rate, resulting in a significant loss of up to 45% of the withdrawn amount.

South Africans can consider taking out a pension-backed loan. Larger financial services providers and funds may offer these schemes that are secured by someone’s pension fund savings.

However, if the retiree becomes delinquent, this means that their only source of retirement income is at risk, Kriek warned.

Much cheaper than buying a retirement home outright, South Africans could also buy a life right that allows them to live in a retirement village home until death.

The downside is that the property is not part of their estate, and the purchase must be made in cash, as banks will not fund it.

Finally, South Africans can consider alternative home loan providers like an instalment sales purchase, which means the consumer won’t own the property until they fully pay off the loan.

Retired or elderly applicants may be required to pay a higher-than-average deposit and prove a diversified set of income sources, but the mechanism is more flexible for elderly buyers.

Kriek stressed the importance of adopting a retirement outlook ahead of time. While people naturally avoid thoughts of mortality, they must plan for the day when they may be too old to cope in their current home.

At that point, it becomes necessary to buy a more affordable property, especially one close to frail-care facilities.

“You need to face reality and prepare yourself for that eventuality, including where you will live and how you will fund that all-important purchase, especially since mortgage lenders likely won’t help when you arrive at retirement,” he said.