In 2009, the government passed a bill that would allow pension holders to use their schemes as mortgage collateral. Shortly thereafter, British American Insurance signed a merger with Housing Finance allowing plan holders to purchase homes using part of their accumulated pension. This means that anyone with a pension plan can use some of that money to buy a home.

With Mortgage lenders like Housing Finance expressing happiness over the new move, maybe it’s time to consider your options.

How does it Work?

The first thing a potential borrower needs is a pension plan. This scheme is then reviewed by the lenders and their underwriters to ensure that it falls in line with Section 38 of the Retirement Benefits Act.

The amendment to the Act allows policy holders to use up to 60% of their accumulated pension for housing loans. Mortgage lenders can use the initiative as soon as they register with the Retirement Benefits Authority (RBA). They can then have the capacity to lend 100% to 115% of the property value.

The additional lending goes towards, government tax, legal fees and valuation expenses. The pension plan is used primarily as a form of collateral in case the borrower fails to clear his debts. What’s more, collateral can be transferred from one scheme to another, assuming the policy holder has more than one.

What are the Benefits?

The move enables anyone with a pension plan to get a housing loan. According to the Ministry of Finance, the initiative will also include members of the informal sector due to the growing popularity of low-income retirement plans in the country.  It has been tailored to meet the needs of other retirement schemes.

Married couples are able to use their joint retirement plans if one scheme is not enough. The amendment also allows other housing lenders to execute the initiative as long as they register with the RBA.

On the other hand, borrowers will be able to receive loans exceeding the actual property value. For instance, Housing finance has partnered with British American Insurance to launch Home Freedom, a product that allows the lender to give up to 115% financing of the open market value of the property.

The Local Authorities Pension Fund (LAPTRUST) has also been included in the joint venture, giving local authority employees a chance to take out mortgages. What’s more, the pension plan remains stable as long as the borrower does not default on the loan.

What are the Risks?

The borrower’s pension scheme is safe as long as they meet all the basic requirements of debt management. Defaulters risk losing most if not all of their retirement benefits. Years of accumulated pension funds can be lost in an instant if the policy holder skips out on a payment.

For couples, the liability is passed on to the survivor if one of them dies. This means that one person will be used to foot the bill if particular safety measures are not put in place. For instance, if the husband passes and the beneficiary is not the wife, the man’s pension scheme can no longer be used as collateral.

In case the borrower is sacked or otherwise unemployed after applying for the scheme, they will have to continue making deposits to their pension plan. If they fail to do so, they risk losing their home and can be black-listed as defaulters.

According to a report by Hass Consult, one of Kenya’s biggest housing firms, the mortgage market for new loans will increased to about KES 8.7 million in 2012 from KES 7.7 million in 2009, when the service was officially launched. The market has already reported a 20% increase in mortgage accounts over the past two years, despite high housing lending rates.