Are pension-backed mortgages a flop?

BY JACKSON OKOTH

Plan to get a mortgage by simply using part of one’s accumulated retirement savings as collateral against a home ownership loan does not appear to be working. This can be seen by the low reception pension-backed mortgages have received in the market severely starved of viable options when acquiring a house.

"Since pension-backed mortgages were introduced, their uptake has been low due to poor design and execution by players in the pension industry," Tirop Kosgey, Permanent Secretary, Ministry of Housing The Standard On Sunday in an interview.

Housing Finance was the first to exploit this new avenue where upfront costs and down payment requirements needed to receive a mortgage will be covered by 60 per cent of one’s retirement savings. Intense lobbying is also on by players in the insurance industry pushing for clients to use part of their life insurance savings to access mortgages.

The thinking within the Housing ministry and the construction industry is that actual pension funds should be used to construct houses directly rather than be used as collateral.

"Mortgage finance remains out of reach for many with the cheapest house of Sh2.1 million requiring only those earning a salary of Sh35,000, for a loan whose repayment period stretches for a period of between 18 to 20 years," said Kosgey.

Lack of affordable mortgage finance, shortage of building materials and high poverty levels is hindering supply of affordable housing to middle and low income groups. Other factors causing a gap in supply of affordable housing units is lack of contractor capacity and access to land.

Complicated process

With annual demand standing at 200,000 units, Kenya is only able to supply about half of this. "The deficit situation is further aggravated by the fact that we also have a backlog in delivery of two million units, which has occurred due to several supply-side constraints that has persisted over the years," said Kosgey.

The Government relaxed pension fund rules in 2009, allowing workers to borrow house loans secured by their retirement savings.

"We were hoping to have done better, but have not been able to meet expectations. We need more to be done by the trustees in terms of creating awareness and educating members," said Frank Ireri, the Housing Finance MD.

Under pension-backed mortgages, up to 60 per cent of contributions can be pledged as loan guarantee but the property still remains the primary security. The arrangement enables lending of up to 115 per cent of the property value, with the buyer relieved of the need to raise deposit, stamp duty valuation and legal fees.

Pension backed mortgages are offered by both Housing Finance and CFC Stanbic Bank, while other big hitters in the credit business have given it a wide berth.

Real Estate Investment Trusts (REITs), another avenue to enlarge home ownership, especially for retail investors, has remained on the drawing boards.

Meanwhile, available figures indicate that a large portion of people in Nairobi and other urban areas live in informal settlements. Unlike in the past, there are now more banks with a portfolio providing customers with mortgage finance facilities," said Kosgey.

Already, public discussions on a new Housing Bill that will radically change the provision of housing in the country, is complete.

The new law seeks to lower the cost of housing and make it more accessible. This is through establishment of a national housing authority and a national housing fund that will oversee and finance construction of low cost housing units.

The fund will be allocated five per cent of national revenues, with employers being compelled to provide additional funding. The Bill, expected to be debated in Parliament in April this year, seeks to improve access to housing, especially for low-income earners.

Key contents of the Bill include creation of an authority, a body that will supervise all housing and settlements in Kenya. The authority will also be responsible for financing all national and county housing projects besides providing basic infrastructure so as to bring down the cost of housing.