What happened to pension-back mortgages?

In a bid to encourage more Kenyans to borrow house loans, some financial institutions introduced pension-backed mortgages, but the move seems to have garnered little acceptance, writes JACKSON OKOTH

A 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 of acquiring a house.

Tirop Kosgey, Permanent Secretary, Ministry of Housing.

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

Housing Finance (HF) was the first to explore this new avenue where mortgage upfront costs and down payment requirements would 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 those earning a salary of Sh35,000 to get a loan whose repayment period stretches for a period of between 18 to 20 years," said Kosgey.

Pension fund rules

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 in Kenya. Other factors causing a gap in the supply of affordable housing units is lack of contractor capacity and access to land.

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.

Frank Ireri, Housing Finance Managing Director.

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 Managing Director.

Under pension-backed mortgages, upto 60 per cent of contributions held with a scheme provider can be pledged as loan guarantee, but the property still remains as the primary security.

The arrangement enables lending of upto 115 per cent of the property value with the buyer relieved of the need to raise deposit, stamp duty valuation and legal fees.

Apart from HF and CFC Stanbic Bank, other financial institutions are yet to venture into pension-backed mortgages.

Real Estate Investment Trusts (Reits), another avenue to enlarge home ownership, especially for retail investors, is still on the drawing board.

Informal settlements

Meanwhile, figures from the Ministry of Housing indicate that a large portion of people in Nairobi and other urban areas in Kenya live in informal settlements. For instance, it is estimated that 90 per cent of Nairobi residents live in only 20 per cent of the land area in the city, while the remaining ten per cent live in 80 per cent of the available land here.

Majority of people in Nairobi live in slum areas and other informal settlements due to their low income and high poverty levels.

However, the situation improves as one moves away from Nairobi towards areas like Nakuru, Eldoret, Nyeri and Kakamega where only 30 per cent of the population lives in informal settlements.

Although supply of adequate housing units is still a challenge, significant progress is being made.

"There is a plan to establish a national contractors’ authority, which will address issues of contractor capacity.  We now have two additional cement factories as well as local manufacture of such materials as panels and roofing materials made from steel. Unlike in the past, there are now more commercial 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 are 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.

Housing Bill

The Housing Bill to be debated in Parliament next month, seeks to improve access to housing, especially for low-income earners currently living in informal dwellings and slum areas in Nairobi and other urban areas.

Key contents of the Housing Bill include creation of a national housing 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.

"The authority will refund developers for doing the infrastructure element of the project with a view to passing over this benefit to buyers of the property," said Housing Minister Soita Shitanda.

In order to bring down the cost of housing, the authority will provide basic infrastructure including roads, water, sewerage and sanitation.

The national housing fund, to be created under the new law, will be used to construct low-cost housing units. The fund will draw a five per cent allocation from the national revenue kitty as well as levies and statutory contributions from employees and employers.

The plan to introduce a Housing Bill is happening when initial plans by the Government to upgrade slums within Nairobi, has run into problems.

"One of the challenges facing the Government’s slum upgrade programme is that landlords adjust rents as soon as these areas are improved, pushing out the initial low-income dwellers. Further, most slum areas sit on private land and this limits access," said Kosgey.

Although some residents of Kibera slums in Nairobi were relocated, an upgrade of this area has suffered legal obstacles for the past two years. The Government is now resorting to providing basic amenities in such slum areas such as water, roads, schools and health centres — a primary level intervention to improve the quality of life within these settlements.

To ascertain housing delivery levels, the Government is currently conducting a pilot housing survey that will soon be rolled out to the rest of the country.

"We will create a data base that will include information on all residential houses and buildings, levels of occupancy as well as commercial spaces," said Kosgey.

Already, some four consultants as well as staff have been recruited to undertake this housing survey that will involve the Kenya National Bureau of Statistics.