By Lukas Kumonika
GIPF has announced the commencement of the Pension Backed Home Loan Scheme (PBHL). Under this arrangement, a civil servant may take housing loan secured against 33.33 percent of their pension benefits, which will be used to settle the outstanding loan balance in event(s) where they are defaults on repayments.
The scheme has any other benefit offered by home loans obtained through commercial banks with additional benefits such as financing in both proclaimed and unproclaimed areas; affordable interest rates (repo rate + 2.5%); early settlement not subjected to penalties.
Once implemented, the initiative will have some implication to household, business and government as players in the economy.
Implications to household
PBHL has is offered at the interest rate that is below the one offered by the commercial banks hence a financial relief to the civil servants who will utilise this option to purchase, construct or renovate their house or to redeem an existing loan.
It was announced that interest rate will set as a sum of repo rate and 2.5% which is 9.0% at the current repo rate of 6.5%. Moreover, the scheme increases the bargaining power of civil servants as the can use this to negotiate for better interest from commercial banks.
Those that have existing loans are also given an option to move their loan form commercial bank to this scheme.
However, borrowers should assess total costs of transferring the loans, including any early settlement penalties, and weigh them against the expected savings from lower interest rates. the source of fund for settling that cost involved is another consideration. If the source is another loan it is likely that the former offset the later resulting into a
little or no benefit. There are no early settlement penalties applicable in events where the loan was paid back earlier than agree hence reducing the financial burden.
The Pension Backed Home Loan Scheme has closed a long-standing gap in housing finance market through access to housing finance for properties located in unproclaimed areas. The current schemes including the government home owner’s scheme addressed this particular issue.
Government employees who work or choose to live in unproclaimed areas were indirectly compelled to purchase houses in proclaimed areas to qualify for housing finance.
Under this arrangement, eligible borrowers can now construct homes in their preferred places of residence. It worth noting that access to housing finance requires proper land ownership documentation therefore, applicants intending to build in unproclaimed areas must have a valid land ownership certificate.
Conversely, the scheme stimulates housing demand thus contribute to higher house prices,. In the presence of an existing housing backlog, demand is likely raise faster than the supply, leading to price increases. It therefore, crucial to note that PBHL will increase prices in a long run if it is not accompanied initiatives that boost supply.
Implications to business
The scheme has mixed effects to different sectors of the economy. Firstly, the scheme will boost performance in the construction sectors. The construction of houses has spill over to the wholesale and retail sector through purchasing of furniture and building materials.
Furthermore it will boost demand in profession services from engineers, lawyer accounts etc. The ultimately, effect on commercial banks will depend on whether new business gains from expanded banking services caused by increased lending activity outweigh the losses associated with loan transferred to the new scheme and weaker bargaining power due to lower interest rate offered by the new scheme. .
Implications to government
PBHL will increase revenue for the governments through taxes on property. The local authorities will collect fees from the provision of services such as water, electricity. However, there also under pressure to meet the increasing demand for those services as proclaimed areas expand.
In the proclaimed area the already increase authorised sale of land is likely to exacerbate. If homeownership induces family formation then demand for social services particularly education may rise, increasing pressure on government provision.
Overall, the scheme is beneficial, but without proper considerations it could have adverse effects. Households should therefore conduct a careful cost–benefit analysis before borrowing. Borrowers who intent to build in unproclaimed areas must also comply with communal land registration requirements.
Local authorities, together with other relevant institution, should be strengthened to accommodate the additional service demand induced by this initiative. Supply-side stimulus measures should be implemented to prevent the existing backlog from increasing.
* Lukas Kumonika is a National Development Advisor: National Planning Commission (NPC). These are his own views.
