Is borrowing from your pension a good idea?
Grand Cayman’s pension home loan program continues to grow. Since the program’s start in November 2011, the Department of Labour and Pensions has approved over 506 pension home loans, with a total value of $10.3 million. This is up significantly from 137 pension home loans, with a total value of $2.65 million, approved in the first year of the program. Despite the growth, debate continues over the pros and cons.
The program allows Caymanians (expats are excluded from participating) to borrow up to $35,000 from private pension savings like your Silver Thatch plan to buy or build a home, pay off an existing mortgage of $35,000 or less, or purchase residential land. To pay back a pension home loan, you must increase your pension contributions by 1% of earnings until the earliest date you have:
- completed 10 years of additional contributions,
- additional contributions equal to the amount borrowed from the plan,
- retired, or
- reached your retirement age (the first of the month on or after your 65th birthday).
While borrowing from your pension to help finance your home has its attraction, you should carefully consider the real cost of borrowing from your pension savings. Before you jump in, it’s best to consider the pros and cons of a pension home loan.