Housing Finance to source funds from foreign investors

Mortgage lender Housing Finance has announced plans to tap international markets for long-term funds to finance fixed-rate home loans.

Frank Ireri, Managing Director of the mortgage firm, said HF is negotiating for the funds with “several” international development finance institutions.

The target is to have the money by the second half of next year.

“We hope to conclude our first major financing some time in the second quarter of 2012,” said Mr Ireri, disclosing that the Sh7 billion HF raised late last year from a corporate bond issue had been exhausted.

But he declined to disclose the size of loans the lender is negotiating.

The lender said raising funds from the international markets would also cushion it from the high local interest rates.

He said reliance on short-term funds had proved un-sustainable due to the instability of interest rates especially for funding mortgage products which are often long term in nature, exceeding 10 years.

Repayments for a mortgage loan offered on variable interest rate terms is dependent on the prevailing interest rates in the market, which makes it difficult for borrowers to plan on the instalments they would be paying.

“Our focus is to borrow funds re-payable in 10 to 12 years which will enable us to offer our clients fixed-rate mortgages.

To hedge against the foreign exchange fluctuations, we will extend loans in dollars, if we borrow in dollars,” he added.

HF’s decision to source for funds from international investors comes amidst a monetary tightening stance adopted by the Central bank of Kenya, which has among other measures raised the policy rate to 16.5 per cent.

As a result, commercial banks have raised their average effective lending rates to 27 per cent in the latest round of rate increases, which have affected even the repayments on outstanding loans, among them mortgage loans offered on variable interest rates.

The mortgage lender suspended plans to come back to the market to float a Sh3 billion bond— earlier scheduled to form the second tranche of a Sh10 billion corporate paper that was approved last year by the Capital Markets Authority.

A survey by the World Bank and CBK last year found volatility of interest rates is among factors that had discouraged individuals from home acquisition through mortgage.

Mortgage lenders have said the reliance on short-term funds such as customer deposits to give home loans has also limited funds available for lending.

The cost of short term funds is heavily dependent on the prevailing monetary policies, making it difficult to offer borrowers fixed rate mortgages.

HF has mortgage lending with a fixed rate component, offering borrowers 14.5 per cent for the first five years and variable rates afterwards.

Home loans by KCB, which the industry regulator estimated to command the largest share of the mortgage market last year, are currently priced at 24 per cent.

Joram Kiarie, the director in charge of the mortgage division at KCB, said in a past interview that the bank’s cost of funds were heavily dependent on short-term rates and was therefore unable to offer mortgage on fixed rates.

The benchmark interest rate on the 91-day shot up to 16.2 per cent in this week’s Treasury Bill auction, more than eight times the rate a year ago, a factor that has discouraged firms from borrowing.
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