RBA allows use of pension savings to secure home loans

Kenyan workers can now use their pension savings to guarantee deposits for the purchase of homes and related transaction costs, new regulations aimed at encouraging home-ownership say.

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Real estate market players said the regulations effectively mean that anyone with pension savings can use the money to seek financing in excess of what they would ordinarily qualify for because the financiers can take the pension savings as collateral for any amount disbursed above what lenders would normally grant.

The regulations are part of a new set of laws contained in this year’s Finance Bill.

On Monday, the industry regulator — the Retirements Benefits Authority (RBA) — said in a notice published in daily newspapers that borrowers can henceforth use up to 60 per cent of accrued retirement benefits to offset outstanding mortgage loans in case they lose their jobs and are unable to service pay back.

The new laws are expected to give the mortgage market a new lease of life by helping prospective buyers overcome the challenge of raising the 20 per cent down payment required by lenders.

Charles Machira, the head of supervision and compliance at RBA, said the provisions are expected to boost home ownership by eliminating the deposit hurdle that is the single largest barrier to potential buyers.

“Borrowers can now access credit of up to “110 per cent of the value of the home,” he said.

Kenyan lenders ordinarily finance up to 80 per cent the value of the property their clients want to buy, leaving the borrower to raise the remaining 20 per cent plus closing costs estimated at 10 per cent of the value of the home.

For a home worth Sh8 million, for instance, the lenders will ordinarily finance the buyer to the tune of Sh6.4 million leaving them to raise Sh2.4 million to cover the deposit and closing costs including stamp duty (Sh320,000), legal and other closing costs (Sh480,000).

Under the new provisions, a borrower can be financed up to the tune of Sh8.8 million, removing the need for such a borrower to raise any funds as long as 60 per cent of the accrued retirement savings can guarantee the Sh2.4 million required.

Recent home-loans market surveys have singled out upfront cash requirement as one of the biggest obstacles to the growth of the market.

The Central Bank of Kenya’s latest survey whose results were published last month showed that the entire banking sector had disbursed 16,135 mortgage loans by end of December 2011, having grown by a paltry seven per cent over a 20-month period.

A previous survey done in collaboration with the World Bank in May 2010 revealed that there were 15,049 mortgage loans and that exorbitant lending rates and high closing costs were the main hurdles to the development of the mortgage market.

Mortgage lenders say that the new provisions could allow thousands of prospective buyers currently locked out of home ownership due to the difficulty of raising about 30 per cent of the value of the property in advance to become home owners.