Why is Kenya’s mortgage market not growing?

Personal finance

Why is Kenya’s mortgage market not growing?

Financial institutions have begun announcing new risk-based interest rate pricing formulas for mortgage loans. FILE PHOTO |: SHUTTERSTOCK

Kenya’s dream of home ownership through mortgages turned upside down after financial institutions began announcing new risk-based interest rate pricing formulas that made loans more expensive, outperforming the intended market.

Last week, Equity Bank surprised the market by revising their personal loan rates from 15 percent to 18 percent.

News on the banking corridors suggests that other financial institutions are developing new interest rates and will follow suit with announcements in the coming weeks.

The grapevine is ripe with information that the new rates will be revised from 3 percent to 5 percent on top of the current individual and corporate rates.

While it’s not clear at what specific limits banks decide to revise mortgage rates, past trends have shown that such loan-to-value revisions for individual loans parallel revised loan rates across the spectrum, including mortgages.

“Banks are leveling their interest rates, taking into account the risks in the market and following the monetary policy committee of the central bank, which revised the base lending rates upwards,” said property finance expert Arthur Ombati.

Read: Expensive bank charges and fees triple home loan repayment

“Every time a financial institution raises interest rates, loan take-up goes down because credit is more expensive.”

Property finance experts say the development sends the wrong signal to the market and is sure to slow the uptake of an already depressed mortgage market as individuals and corporates shy away from mortgages.

A source at mortgage firm Housing Finance hinted that developments around interest rates would certainly weigh on the market, a sector already hit by Covid-19, the election and an uncertain economic environment.

“Already our books are full of apartments that have been taken over but cannot be sold. Even when we advertise for auctions, there are few purchases. Most people don’t know, but we are cash-strapped,” said a Housing Finance official, who did not want to be quoted as they were not authorized to speak for the company.

A check at financial institutions revealed similar cash flow concerns with a growing inventory book of repossessed units.

But why is Kenya’s mortgage market not growing?

“The problem with mortgage pricing in Kenya is that we don’t have a full fixed rate mortgage where the interest charged at the time the loan is taken out is binding until closing. We do not have a good source of long-term capital to finance mortgages because most institutions still rely on short-term deposits which they give as long-term mortgages,” said Ombati.

“What we have are variable rate mortgages, the interest rate of which goes up or down with changes in prevailing interest rates as signaled by the central bank.”

The news of the rate hike comes after the latest Central Bank data showed that interest rates charged on mortgages rose by 3% last year compared to the previous year, a trend seen by borrowers. mortgages that pay up to three times the value of the housing unit at closing.

Kenya’s mortgage market is consistently low. There are only about 25,000 mortgage accounts in a country of about 50 million people.

Experts say that as a result of the new wave of interest rate hikes, those looking for homes this year are likely to choose alternatives such as tenant buyout schemes or build units individually over time.

In addition, the industry’s savior, which specifically negotiated the company’s schemes, an arrangement where a company lends a certain amount of money to a mortgage company in exchange for subsidized mortgage rates for its senior staff, has also fallen as companies shy away. heavy benefits in addition to wages during employment.

But all is not lost.

Read: Why are mortgages rising?

National Housing Corporation CEO David Mathu said plans are at an advanced stage to begin construction of 3,500 affordable apartments at Stoni Athi in Machakos, which will be put on the market under a rental or tenant purchase scheme. .

“We are aware of the current market realities and that is why we are fast-tracking this affordable housing project to be purchased through tenant purchase schemes,” Mathu said.

“We are already engaged with the International Finance Corporation for this tenant purchase project in Stony Athy and the financial advisory services department is already in place. The development is carried out in the framework of public-private cooperation and as a joint venture. The project should be implemented within two years.”

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