Workers saving for home purchase to pay less tax


Parliament Majority Leader Aden Duale. FILE PHOTO | NMG

Workers saving in mortgage firms for home purchase will pay less duty if a proposal to widen income tax refunds to Sh8,000 monthly passes.

The government has proposed to amend the Income Tax Act to savings caps that will guarantee savers a tax rebate of Sh8,000 monthly, from the Sh4,000 that has been in place for 22 years to boost home ownership.

This means savers earning Sh50,000 a month will pay income duty on Sh42,000 if they save the maximum Sh8, 000 under Home Ownership Saving Plan (Hosp), translating to monthly tax savings of Sh2,000.

Under the current law, savers are allowed duty rebates or refunds on maximum savings of Sh4,000 under Hosp, offering them a monthly tax savings.

“The Bill seeks to amend the Income Tax Act to enhance the tax incentive on home ownership,” says Majority Leader Aden Duale.

Savings scheme

Hosp was conceived as a 10-year saving scheme to cater to people who save to acquire homes or are building deposits for easy access to mortgage.

It was introduced on January 1, 1996 with its rates being adjusted for the last time in 2007/08 financial year.

In Kenya, most banks require borrowers to provide cash equivalent to 15 per cent of the value of a home before accessing mortgages.

Less than 10 per cent of Kenya’s housing credit is in the form of bank mortgages, with most people borrowing from savings and loan cooperatives, funded by members’ deposits, the World Bank says.

Kenya had just 24,458 mortgage loans valued at Sh200 billion or 3.15 per cent of GDP in 2015, compared with about 30 per cent of GDP worth of outstanding mortgages in South Africa.

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Lack of deposits

Lack of deposits required to access mortgage has been cited as one of the reasons behind the small number of home loans, prompting tax incentives to boost savings for property acquisition.

Kenya has an estimated 200,000 annual housing shortfall, which is expected to rise to 300,000 by 2020.

Government has also published a Bill that will exclude first time home buyers from paying stamp duty equivalent to four per cent of the value of a property, in a bid to help workers struggling to get into the property ownership bracket.

The two initiatives is backed by the set up a mortgage refinancing company to help to meet the government’s aim of providing 500,000 houses in five years as well as make it easier for banks to access long-term finance for home loans.

Sh16bn debt financing

Kenya Mortgage Refinancing Company (KMRC)is expected to be licensed by the central bank in February next year, with initial debt financing of Sh16 billion from the World Bank for lending on to financial institutions.

Once it starts operations, the company will raise debt from markets, including mortgage-backed bonds, to lend to banks and financial co-operatives using their mortgage loan contracts with customers as security.

Lenders, among them KCB Group which has the biggest share of the mortgages, usually shy away from writing housing loans mainly due to lack of long-term deposits in the industry to match them.