Kenyans will be able to buy houses worth up to Sh5 million using their pension contributions as a guarantee for mortgages in a move that is set to spur activity in the home loans market.

Pension contributors would be allowed to direct a maximum of 25 per cent of their pension pay out to finance their mortgage payments, according to a draft developed to guide the provision.

This will see pension contributors, who have been struggling to get security for housing loans, buy homes early on in their working careers besides acting as a key driver to the housing market.

It will also see a huge fraction of pension contributors hedge against housing inflation and acquire homes at lower prices. Many are currently resigned to buying homes at retirement when they also face the challenge of ensuring that the investment does not erode their savings to a level where they have to live as beggars.

The regulations open the door to early home ownership for all contributors except those who have fewer than five years to reach the retirement age prescribed in their employment contracts. With the private funded pension scheme currently controlling assets of about Sh270 billion, it means the housing loans market will have access to about Sh67 billion of pension funds, which is 10 times what the market leader Housing Finance lent out in 2007.

But the beauty of the deal lies in the lower monthly mortgage payments that come with the new provision now that the Government, Retirement Benefits Authority (RBA) and the industry players want to model its workings on that of the UK, whose pension contributors can access housing finance once they join a scheme.

They only pay the interest charge during their working life while the principal loan is recoverable from the lumpsum payment at the end of their careers. The lumpsum payment is normally equivalent to 25 per cent of the total accrued pension.

In Kenya, its still not clear whether the mortgage takers would pay the part of the principal amount during their working life or have the amount recovered upon their retirement. Either way, players say it would translate to reduced monthly payments.

"Mortgage loans risks will be mitigated as they will now be spread to additional collateral in the form of pension savings," said Mr Chris Chege, a senior relationship manager in charge of mortgage at Housing Finance, adding that the net effect of this would be the reduction in monthly mortgage charges.

The final set of regulations are expected to be released in the next three months after all stakeholders give their views on the draft, which also proposes that pension scheme members should be able to use the contribution to borrow for building or repairing houses.

Lack of financing and fear of taking up loans has led to a low demand for mortgage products in Kenya at a time when the country is reeling from an acute housing shortage.

The Kenya National Bureau of Statistics indicates that the demand for housing has outstripped supply- which stands at about 30, 000 units per year by five times - compared to a demand of 150, 000 units.

Brisk business

This is the demand that mortgage providers are looking at and which they say would translate to brisk business for home loan providers once pension assets are allowed to act as security for home loans.

The mortgage providers are preparing to claim a stake of the pensions industry growing asset base in a move that will dramatically change the fortunes of mortgage firms including Savings and Loans, Housing Finance and new entrants like Stanbic Bank through increased demand for housing loan.

"This will open a new clientele for mortgage providers and this is good news for us," Mr Ken Kinyua, the director of business development at Housing Finance, said in an earlier interview.

Already, mortgage companies and lenders are said to be preparing new products for the new line of business.

Housing Finance earlier said it has developed a product to capture the business which it will unveil once the draft is enacted.

The lenders will be the principal partners of pension schemes in the new arrangement, according to the draft, which sets stringent transparency rules for the lending organisations that will partner with the schemes.

Such organisations will be required to apply for approval from the RBA and provide capitalisation, cash reserves and experience in the provision of housing products and services.

The regulations also require scheme trustees to ensure that the loans are fully insured, a cost to be incurred by the pensioners. Questions, however, are being raised as to whether 25 per cent of pension will be enough for property purchase in the wake of skyrocketing property prices, which have increased by 50 per cent over the past five years, according to Mr Paul Sigsworth, the managing director of ICEA Asset Managers.

But players in the pensions industry are upbeat that the proposed mortgage deal would act as a catalyst for more Kenyans to channel their savings to retirement schemes at a time when most Kenyans are not saving for retirement.

"It's a huge incentive to the industry, and we are bound to see lots of activity in the pensions sector," said Mr James Oyugi, the pensions manager at CFC Life.

The country's retirement benefit coverage -the ratio of the working population covered by pension schemes - stands at 15 per cent, a poor comparison to the global average of 30 per cent.