Employer backed mortgage schemes

May 22nd 2013, Unfriendly interest rates and a volatile market are some of the reasons many stay clear of mortgages. Some employers are, however, stepping in to negotiate better terms for their employees, and a question you could ask yourself today is; what can the company do for me? Writes PETER MUIRURI

For years, Peter lived with his family in Ongata Rongai on the outskirts of Nairobi. However, the father of four dreaded the daily commute to his place of work in the city centre due to the legendary traffic jam and insecurity issues associated with the area. His desire was to move to a location nearer to the city.

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In 2006, he identified a house in Lang’ata that was selling for Sh4.6 million, a figure that was more than his savings.

“I approached my employer, who enrolled me in a company negotiated mortgage scheme administered by a local lending institution. My job category could only allow me to get a loan facility of Sh3 million charged at an interest rate of seven per cent. I raised a 20 per cent deposit amounting to Sh920,000 with the lender topping up the remaining Sh680,000 that was charged at the then prevailing market rates. The result was that I was able to service the mortgage at Sh45,000 a month, a figure that could have doubled if the loan was charged at normal market rates,” he recalls.
Peter is among the many beneficiaries of corporate funded mortgage schemes that are intended to attract employers wishing to bequeath lasting and tangible benefits to employees.
According to an online report by Housing Finance, institutional employees are looking beyond the usual monetary tokens to more lasting opportunities that will enable them better their lives, paramount among them being home ownership.
Under the funded scheme, the employer deposits a lump sum of money with the lender, who in turn uses these funds to extend mortgages at discounted rates to a number of nominated employees. 
The lender enters into a pre-negotiated, lower-than-market interest rate with the employer who then passes this on to the employees. As the fund’s administrator, the lender charges an agreed margin as service charges, a fee that is covered by the employer.
“Although we may use company deposited funds, we still remain the lender of risk and hence, the small mark up on the deposits,” says David Maveke, head of Mortgage Business at Housing Finance.
The schemes’ portfolio at Housing Finance stands at 30 per cent of the entire loan book.

Rules of scheme
Although the rules of the scheme are largely decided upon by the sponsoring agency, they must meet the minimum lending conditions of the financial institution and government regulations on the same.
A number of the scheme’s administrators say this arrangement creates a win-win situation for all players.
George Laboso, who heads the mortgage section at Family Bank says the product transfers the headache of dealing with in-house mortgage management issues at company level, to those well versed in the business.

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“The funded scheme is a mode of outsourcing mortgage management by companies, thus leaving them to concentrate on their core business rather than having to deal with individual mortgage requests by their employees. They only need to set aside some cash and leave it to professionals in the field to administer,” says Laboso.

Apart from company employees, Family Bank also uses the scheme to administer funds deposited by organised groups such as chamas.
Using the funded scheme product, the employee is able to service the mortgage at an interest rate that can be as low as five to eight per cent, owing to the fact that the lending agency does not have to look for external and more expensive source of funding.
The mathematics are simple. Take the example of a mortgage amounting to Sh5 million. Charged at an interest rate of 16 per cent over a 20-year period, monthly repayments amount to a little under Sh70,000. Charging the same amount at an interest rate of six per cent will incur monthly repayments of Sh35,821, or half the amount repayable under current market rates.
According to Laboso, the company or sponsor funded scheme presents a unique front for companies that need to retain and reward good talent.

Benefits
“The scheme offers benefits not only to the employee, but the company as well. By rewarding staff loyalty, the company gets to retain the best talent. On the other hand, the employees are motivated to work for the company as they realise their ultimate goal of having a home they can call their own,” says Laboso.
Family Bank requires that a company nominates a minimum of 20 employees for the scheme.
Kenya Commercial Bank Director of Mortgages Joram Kiarie, says that out of the bank’s Sh32.5 billion loan portfolio, Sh5 billion falls under such schemes.
“The deposits may vary depending on the company’s source of funding. The sponsoring corporates also cut across the board including private companies, government agencies to more established institutions,” says Kiarie.The bank’s current interest rate for a normal loan stands at 16 per cent.
“The success of the funded scheme depends on how a company’s human resources desk seeks to reward the employees.  When a request to administer such funds comes to us from an institution, their employees are treated in the same manner as our own bank workers who get to access such funding under similar terms,” says Kiarie.

Fixed rates

Unlike individual mortgage uptake where interest rates vary depending on Central Bank’s base lending rates, a funded scheme’s interest rate remains fixed for the entire life of the mortgage, making it possible for workers to budget appropriately for their other family or personal obligations.
The parties, however, are at liberty to revise the rules as the need arises.
According to Caroline Kariuki of The Mortgage Company, the low mortgage portfolio in Kenya is mainly due to high interest rates levied by financial institutions including the regulator, Central Bank.
She says the funded scheme is partly an answer to this problem that has, in the past, worked well for a number of government workers who could afford mortgages pegged at an annual interest rate of five percent.
However, there are times when a company may not have the ability to commit large sums of money to the programme despite its willingness to assist employees access mortgage financing.
In such cases, the company can enter into negotiations with the lender by signing a memorandum of understanding where the two parties agree on a financial package whose interest rates are still below the market rates.
“The discounted interest rate is worked out depending on the volumes that can be generated from the staff taking mortgages and the term of the expected mortgages,” states Housing Finance.

Arrangement
According to Kiarie, there are instances where the employer commits to carry off some of its employees’ burden by shouldering a big percentage of the interest rate, while the worker pays off the remaining portion.
For instance, if a worker’s mortgage is attracting a 15 per cent interest rate, the employer can decide to pay the ten per cent portion with the employee’s payroll reflecting the remaining five per cent.
Depending on the company’s financial ability, it is also possible to create a hybrid system by fusing together both the funded and non-funded schemes.

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In this arrangement, the company or sponsor may only remit half of the loan amount while the financial institution funds the remaining half. Like the fully funded scheme, the portion backed by the employer attracts subsidised interest rates while the portion financed by the lender is charged at the prevailing market interest rates.

For instance, suppose an employer wants to partially fund the mortgage of a worker intending to construct a house worth Sh10 million. The company backed portion of Sh5 million will be charged at a rate of eight per cent, while the remaining half will attract a normal market rate of say 15 per cent.
The staff lending rate, therefore, will be the sum total of the two rates divided by two. The resulting rate of 11.5 per cent will still be much lower than the market rates.

Exit plan
Again, the company-funded part of the mortgage retains a rate fixed throughout the life of the loan while the lender-funded portion attracts variable rates as per the market forces.
What happens when an employee terminates his services with the company that sponsored the mortgage deal?
This was the scenario that confronted Peter, who quit his job in 2009 with an unsettled amount of more than Sh2.7 million. He advises that one should always have an exit strategy. For him, this meant making repayments covering at least four months, buying him time to organise his affairs and clear the balance.
“In some instances, an employee may switch jobs and perhaps go to a company that has a similar scheme with a lending institution. He then has to agree to the terms of engagement set out by the new employer and the fund administrator whether he was in a fully funded or non-funded scheme,” says Laboso.
However, if the employee is not agreeable to the new terms and conditions or is no longer in an institutional framework, his balance can be transferred to the normal, individual portfolio that is subject to the current market dynamics.
Players in the industry hope that more organisations will take advantage of these corporate mortgage schemes that are meant to ease the burden of acquiring a home for their employees.