Pension-backed mortgages to open up rural property market

When we critiqued pension-backed mortgages in this column a few weeks ago, little did we know that the market had since become enthusiastic about the whole idea of people using their accumulated savings as collateral.

The perspective of mortgage players seems to be slowly shifting after the Treasury introduced some amendments to the Retirement Benefits Act, which was first amended in 2009 to allow trustee members to use up to 60 per cent of their contributions as collateral for a mortgage.

This shift came after Finance minister Njeru Githae read this year’s budget statement in June.

Last week, Housing Finance managing director Frank Ireri told journalists he was happy with the new changes, which he said would boost mortgage uptake.

The amendments came after the players lobbied the government out of concern that there was low uptake of pension-backed mortgages.

So, what were the main challenges? The law then required the trustees to amend their trust deeds to allow the 60 per cent assignment of the benefits.

However, the speed of getting this done is dependent on the trustees and so far not many have amended the trust deed accordingly.

The other challenge has been that the market is generally not aware of what pension-backed mortgage can do for them.

In addition, the trustees also still don’t appreciate the benefits members can gain from this product.

This is not good for the idea given that they are the key to unlocking the barriers being experienced currently and ensuring success of the product.

So, what has changed? First, Regulation 4 has been amended to allow for a member to transfer an existing mortgage to an institution — in other words, you can use your pension as a collateral on an existing mortgage.

Previously, only those applying for new mortgages could assign their benefits.

So what? The provision makes it possible for persons taking equity release to assign their pension for further funding.

Regulation 7 has also been amended to allow use of pension as the primary security for rural property acquisition.

Previously, regulations strictly provided for the pension to be a secondary security with the primary security being the property being purchased.

The effect of this is that it opens up the market of rural property where some lenders have traditionally not accepted such property as a security for lending.

Regulation 8 has also been amended to provide for a guarantee for the initial closing costs. The old rules required the primary security to be in place before release of the guarantee.

Players like Housing Finance say that this decision had already been adopted by the business and blends well with what had initially been intended for the product.