Pension backed mortgage promises affordable home ownership but...

Earlier last week, Uganda Retirement Benefits Regulatory Authority as the regulator of the pension sector issued new regulations. Basically stated, these new regulations imply that employees that belong to a licensed Pension scheme like National Social Security Fund (NSSF) can access mortgages or home loans for purposes of purchase, construction or renovation of a residential property/ house by using 50 per cent of their accumulated savings as security as opposed to using the ordinary residential property. Technically they are known as pension backed mortgages.

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The context behind these regulations is based on the premise that the main goal of public pension schemes is to supplement the income of citizens to furnish a comfortable standard of living for life after retirement or in case of career halting events.  A home can provide an added welfare benefit for individuals (and society) that often times goes beyond the market value of the home itself. Universally, homeownership has been associated with better health outcomes, and greater access to a basic necessity.

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The new regulations should be able to spur growth of the mortgage market by offering alternatives for security that are readily available for all employees that save with a licensed pension scheme. The arrangement would also allow for favourable interest rates since banks will have to price them lower than the ordinary mortgages because the cost and timeframe to recoup their capital in case of default is much lower.

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Gaps

Whereas this move is well intentioned, the regulations only address one element/ factor that impacts mortgage growth that is security/ collateral. There is, however, the issue of affordability and the existing short supply of affordable housing. It is said that Uganda’s housing deficit stands at 2.4 million housing units, out of which 210,000 units are in urban areas and 1.395 million units in rural areas.

For the banking sector, there is an opportunity to create products that support borrowing against pension savings. For sure, these accumulated savings provide a better form of security or collateral lessening the risks of lending.  

The regulations do not state whether the licensed pension schemes will directly lend to customers or whether the Pension schemes will provide guarantee to the Bank (third party lender) to enable the fund member to access a loan from the Bank.

Currently, Uganda has an estimated total value of Shs1.6 billion ($429,166) in residential mortgage loans collectively held by formal banking and non-banking financial institutions. Commercial banks and other non-banking financial institutions account for more than 50 percent of this total. Most Ugandans take up unsecured personal loans (estimated at Shs3.4 trillion as at Dec 2021) and incrementally build their homes over a period of time. This has been precipitated by the high interest rates for mortgages and the inadequate supply of affordable housing.

This is a positive step towards driving access to decent housing making home ownership a reality for many by allowing savers to leverage their accumulated savings to meet their housing needs.

But the individual taking up the mortgage should have reliable sources of income to meet their monthly loan repayment obligations. But, the success of this effort also largely depends on availability of affordable and decent housing. Therefore, this will require more concerted effort from the government to engage various key players including real estate developers, banks, pension schemes to fully unpack the regulation to understand the role that each can play to make it successful.

Increased home ownership reduces rental costs for families and they go a long way towards delivering secured retirement.

The author Gloria Kunihira Mujuni is head of products at Absa bank.