Pension-backed mortgages boost to affordable housing

For more than a decade, Kenyans have had the leeway to use up to 60 percent of their accrued retirement benefits as a guarantee for mortgage loans.

However, a study by the Retirement Benefits Authority (RBA) shows that less than 0.1 percent of members of retirement benefits schemes have taken advantage of the provision.

In a bid to further catalyse individuals to utilise their pension savings towards homeownership, the Retirement Benefits (Mortgage Loans) - (Amendment) Regulations was enacted in 2020 allowing members to now redeem up to 40 percent or Sh7 million of their accumulated benefits to buy a ready residential house from an institution.

This has elicited excitement from Kenyans where 68 percent of the respondents in the same survey by the RBA indicated a willingness to take advantage of this.

According to the 2019 census report by the Kenya National Bureau of Statistics, only 23.1 percent of urban dwellers in Kenya own homes while 78.7 percent rent.

Some of the hurdles to homeownership have included high property prices, high-interest rates on mortgage loans and low awareness levels on provisions such as the one mentioned above and reluctance from mortgage financiers to facilitate Kenyans to own homes.

To address these concerns, pension industry players and real estate stakeholders have quickly advanced to collaborate and make the homeownership dream a reality for their members after many years of waiting.

The push to see more Kenyans become homeowners is not solely coming from the pensions industry. The government through the Big Four agenda on affordable housing has been at the forefront of pushing this initiative.

For instance, there is a stamp duty exemption for first-time buyers. Other incentives on the affordable housing agenda include value-added tax exemption on construction materials, a 50 percent reduction of corporate tax on affordable housing to 15 percent for developers constructing over 100 units and a reduction of import levies on supplies for affordable housing suppliers and developers.

Affordable houses are defined as those costing less than Sh4 million in the Big Four agenda.

Pension-backed mortgages have been widely successful in other parts of the world such as Singapore which boasts of a 90 percent homeownership rate 80 percent of it being affordable housing.

This level of house ownership has been achieved through their public pension scheme equivalent to our National Social Security Fund.

Ranked as the second-best in Africa, after South Africa, Kenya’s pension sector presents an even greater potential given the size of the young population.

Currently, we have about 1,246 pension schemes with more than 3.5 million members. These are all potential homeowners depending on their saving level and goals.

However, to enable them to realise this potential, there is a need to go easier on the taxation of pension savings. For example, the 40 percent redemption to buy a house could be exempted from taxation as it would if one was drawing a lump sum of Sh 600,000 from their pension savings.

Additionally, we need to keep the informal sector in the picture and tailor products that suit them, especially on mortgage financing. The KNBS data indicates that as of 2021, the sector accounted for 83.4 percent of all jobs excluding small-scale agriculture. That figure is too large to be left out.

With less than eight years left, the UN Millennium Development Goals and Kenya’s Vision 2030 is closing in.

With a target to provide a high quality of life for all citizens, the level of homeownership in a country provides a measure of the wellbeing of the nation and every citizen has the constitutional right to access adequate housing with reasonable sanitation standards.

On the other hand, homeownership reduces rental costs for families and serves as a measure of wealth since it is an appreciating asset.

These developments in our legal structure are expected to produce positive effects on the pension schemes, their members and the economy as a whole. The biggest beneficiaries are individuals who can now overcome the hurdles of raising a down payment for their mortgage or acquiring full financing to buy a house.

The pension sector savings and enrollment are expected to increase as more members strive to own a home without jeopardising their retirement income flow.

Simon Wafubwa, Managing Director of Enwealth Financial Services Ltd