Demystifying Home Ownership Savings Plan Schemes

Only 26.1% of Kenyans living in urban areas own the homes they live in compared to countries like South Africa with 53.5% or the United States with 64.5%. 

Housing, an important aspect of Kenya’s economy has been a challenge especially with a deficit of 2 million units even as demand grows at 200, 000 units per annum. According to the National Housing Corporation (NHC), supply has never surpassed 50, 000 units per annum.

The Ministry of Housing indicates that 83.0% of the existing housing supply is for the high income and upper-middle-income segments, with only 15.0% for the lower-middle and 2.0% for the low-income population. 

The Government, through their Big 4 Agenda, which covers affordable housing as one of the pillars have, therefore, been seeking to deliver 500,000 units per annum by 2022 costing between Sh600, 000 and Sh3m aimed at 74.5% of Kenyans earning below Sh50, 000 per month. 

However, financing for end-buyers towards the purchase of affordable housing remains a challenge, both on the absolute value of the unit, and the financing structures available for a first-time buyer to access capital towards their unit purchase.

Challenges with affordability of housing

According to the 2015/16 Kenya Integrated Household Budget Survey (KIHBS), only 26.1% of Kenyans living in urban areas own the homes they live in. This is in comparison to countries like South Africa with 53.5% or the United States with 64.5%. This is attributable to the unaffordability of housing units in the market. Those who own homes rely mainly on savings and other sources of financing including mortgage loans, commercial bank loans, and local investment groups commonly referred to as chamas, and Savings & Credit Co-operative Societies (SACCOs).  

Access to housing finance in Kenya has remained a challenge due to the foregoing reasons: Low-income levels that cannot service a mortgage – according to Kenya National Bureau of Statistics, only 2.9% of Kenyans earn above Sh100, 000 per month; Soaring property prices boosted by the demand-supply forces; Exclusion of informal sector employees who, as per KNBS data, make up approximately 83.4% of Kenya’s workforce, due to insufficient credit risk information; Lack of capital markets funding, which tend to be long-term, and can enable real estate purchases for end-buyers; High-interest rates and deposit requirements for mortgage loans, which lock out majority of potential borrowers, and; Underdeveloped mortgage market – According to Central Bank of Kenya, there were only 26,187 mortgages in Kenya as at December 2017 out of a total adult population of approximately 23 million persons, with the mortgage to GDP ratio standing at 2.7% compared to countries such as South Africa and USA, which have a ratio of above 30% and 70%, respectively.

Availability of affordable options 

To enable homeownership, the Government for the past three decades has continued to introduce policy and fiscal reforms aimed at enhancing homeownership. Key among them are;

Mortgage Relief: As per the 1995 Income Tax Act cap 470, borrowing money from a registered financial institution to purchase a home or to improve a home guarantees the borrower a tax relief on interests paid to the registered financial institution of up to a maximum of Sh300, 000 per annum;

Home Ownership Savings Plan:  Introduced in 1995 in the Income Tax Act, Home Ownership Savings Plan is a tax instrument aimed at first time homebuyers, where savings with a Registered Home Ownership Savings Plan for a maximum of ten-years allows the subscribers tax rebates of up to Sh8, 000 per month or Sh96, 000 annually and tax relief on interest income of up to Sh3m after the ten years;

National Housing Development Fund: The Housing Fund was established under the Housing Act 2018 Section 6 (1), under the control of National Housing Corporation (NHC) as provided for in Housing Act Cap 117. The aim of the fund is to allow mortgage and cash buyers to save towards the purchase of an affordable home through the affordable housing Home Ownership Savings Plan (HOSP);

Affordable Housing Relief: The Income Tax Act was amended in 2018 to allow 15% tax relief up to a maximum of Sh108, 000 p.a, or SH9, 000 p.m., to affordable home buyers,

Stamp Duty Act: Amended in 2018, the Act allows for exemption of first-time homebuyers under the affordable housing scheme from paying the Stamp Duty Tax, which is normally set at 2% – 4% of the property value depending on location, and

Kenya Mortgage Refinancing Company: The Company is set to enhance mortgage affordability in Kenya by enabling long-term loans at attractive market rates through the provision of affordable long-term funding and capital market access to primary mortgage lenders such as banks and financial co-operatives,

However, the development of the Kenyan housing finance market has been relatively slow, and not up to pace with the registered housing demand backlog creating the need for more reforms. 

Benefits,  of HOSP Schemes

Home Ownership Savings Plans have various benefits for the lenders, government and the savers. For the government, the schemes alleviate
the housing problem by availing the much-needed housing finance. As it is, there exists a direct correlation between the existing housing finance system and the level of informal settlements in the country, which the World Bank estimated to be 61% of urban dwellers as at 2017.

For mortgage lenders, HOSPs minimize credit risk, as depositors can demonstrate their ability to make timely payments by saving a portion of their income throughout an extended period. As a result, lending to a HOSP subscriber is often less risky than lending to other borrowers. In Ethiopia, there were zero NPLs under the CSH plan as of November 2014, as reported by Commercial Bank of Ethiopia (CBE). Too, given the substantial down payments made by subscribers through their consistent savings, the loan-to-value (LTV) ratio is often significantly lower, which reduces the probability of mortgage defaults. For HOSP subscribers on the other hand, the benefits are wide as well. First, there are tax rebates. According to the Income Tax Act, individuals in a Registered HOSP are guaranteed tax rebates of up to Sh8, 000 per month or Sh96, 000 per annum, while interest income of up to Sh3m are tax-exempt upon withdrawal. With this, assuming a median income of Sh50, 000, an individual depositing Sh8, 000 per month with a registered HOSP account pays 28.1% less PAYE than one without HOSP account. It also boosts the credit profile of the subscriber as the contracted savings made by a subscriber act as proof to the financial institution of their creditworthiness, thus raising their chances of accessing a mortgage loan upon maturity of the savings. Lastly, with an effective regulatory environment, the scheme encourages a savings culture, which ultimately makes it easier for an individual to acquire a home by efficiently raising a deposit for a house loan. According to the World Bank, inability to raise deposits required to access mortgage has been proven as one of the reasons behind the small number of home loans, necessitating the need for tax incentives to boost savings for property acquisition. In spite of this, Home Ownership Savings Plan in Kenya has not been very successful in its overarching objective, which was to avail housing finance and promote a culture of savings for aspiring homeowners. This is evidenced by the fact that only one institution currently offers the product; low homeownership rates as illustrated above; and the relatively low mortgage uptake with 26,187 mortgage accounts recorded as at 2017. 

Limitations 

Few product offerings: According to the Income Tax Act the product is restricted to a few approved institutions. These include; a bank or financial institution registered under the Banking Act, an insurance company licensed under the Insurance Act or a building society registered under the Building Societies Act. So far, only one institution, Housing Finance Company (HFC), offers the product and at relatively unattractive rates as there is no competition. For the past two decades, the scheme has been a preserve of specialist lending institutions such as banks and building societies as stipulated in the Income Tax Act since 1996. 

Low yields: Currently, banks offer interest rates of 7.0% on average for fixed savings accounts. This in comparison to the inflation rate, which has been oscillating between 4.1% – 6.6% means much of the benefits accrued are eroded;

Little public knowledge: With the product being offered by one institution, there is little information available to the public about HOSP.  Fewer people know that it is one of the ways of reducing payable tax in Kenya;

Savings/loan mismatch: In countries such as Ethiopia, individuals are required to either save 10%, 20%, or 40% of the unit value and the remainder is issued out as a loan. However, under the Kenyan framework, getting a mortgage after the ten years is not guaranteed. This means savers must have other funding options such as personal savings, SACCO loan, inheritance or other methods;

Mortgage market/housing deficit mismatch:  The availability of mortgage products is a prerequisite for Home Ownership Savings Plans to be fully effective as upon maturity, the savings only serve as a deposit. House prices in Kenya are relatively high in comparison to what individuals can afford to save due to the low-income levels, necessitating the need for more funding options after the saving period. Additionally, mortgage interest rates must be close to the savings return rate. As it is, few banking institutions offer mortgages, evidenced by the few mortgages registered and the interest rates are considered to be relatively high in comparison to the yields they offer for savings accounts;

Liquidity risk: In Kenya where the median income is relatively low at Sh50, 000, the savings and the loan repayments could also be insufficient to fund more loan demands from subscribers completing their savings phase creating a liquidity risk for the deposit-taking institutions. The tax rebates incentivize savers meaning the product would have a high demand if properly placed in Kenya. This was the case in Ethiopia where the house savings scheme as of 2013 had a waiting list of 900,000 subscribers.

To stimulate the housing finance segment, there is a need to close the large gap in the sector, which can be fulfilled by creating access to other innovative financial markets products, which have more compelling returns.

How to improve HOSP in Kenya

To improve housing affordability, there is a need to provide channels through which individuals in the low and middle-income bracket can use to raise capital to purchase homes. 

Collective Investment Schemes are common among this population, as individuals are required to make relatively low contributions and are able to top-up their savings through a flexible and accommodative program in terms of minimum amounts. However, under the current law, CIS schemes are not considered under HOSP in spite of their potential to revolutionize housing finance. For instance, the money market funds offer relatively attractive risk-adjusted returns with competitive rates of as high as 11%. Additionally, the rates are not fixed which means they are always up to pace with the macro-economic environment unlike the fixed rates offered by banks and other financial institutions. 

Essentially, collective investment schemes are pools of funds that are managed on behalf of investors by a professional money manager. They are specialized market players licensed to mobilize savings through financial assets and to enhance access to capital markets by small investors. They include, among others, unit trusts, mutual funds, investment trusts. For investors, they offer a unique opportunity in terms of professional management, economies of scale, and diversification of portfolio and risk. 

Fund managers invest in various industries and sectors therefore; the portfolio gets diversified resulting in relatively high returns as compared to banks, which largely generate returns from lending members’ deposits. In Kenya, most banks require borrowers to provide cash equivalent to 15% of the value of a home before accessing mortgages, which leads to most people borrowing from savings and loan cooperatives, which are funded by member deposits. Under the affordable housing initiative, homebuyers will be required to pay a 12.5% deposit. To boost HOSP in Kenya, a well-developed capital market and income tax framework are required to enable a sustainable, low-cost capital raising mechanism for affordable housing for both developers and potential homeowners. This can be achieved through: Creating adequate consumer information, which is imperative to encourage households to take up the various incentives offered. Additionally, households should have adequate information to make comparisons and make informed decisions when choosing a depositing institution; Fund Managers and Investment Banks should qualify as HOSP approved institutions, Section 22 C (8) Income Tax Act 2018, and; Allow for specialized Collective Investment Schemes that can focus on investing only in the specific sectors such as the housing sector by amending CMA Act CIS Regulations 139 (1) to allow setting up of specialized collective investment schemes for investment in a specific sector or for a specific purpose.  From a report by Cytonn Invest.

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