Lower mortgage rates so as to attract workers

The fact that only 16,135 people in a country of 40 million have taken home loans points to a serious problem in the mortgage market.

The latest Central Bank of Kenya survey shows that the entire banking sector had disbursed only about 1,000 home loans in a period of 20 months to December 2011.

In a country riddled with a chronic shortage of housing supply, it would be expected that a bigger percentage of the 14.3 million bank account holders would take mortgages to build their own homes.

A long list of reasons has been given to explain the slow growth of Kenya’s mortgage industry.

They range from exorbitant interest charges levied by banks, the low employment rate and weak labour laws to protect workers, unreliable land registration records and high costs of realising collateral security for lenders.

Besides charging high interest costs on mortgages, banks also load down payment, valuation, legal and loan appraisal fees on borrowers.

Most Kenyans have in fact preferred to build houses using short-term bank and savings and credit society (Sacco) loans than take mortgages.

Lenders ordinarily grant home loans that are less than the value of the house covered to cushion themselves against losses in case of default.

This means that borrowers are required to raise up to 20 per cent initial deposit of the value of any mortgage, before accessing a house loan.

The Retirement Benefits Authority (RBA), which regulates management of pension saving schemes, has attempted to help the working class by relaxing legislation on access to their old-age savings.

New RBA rules will allow workers to use up to 60 per cent of accrued retirement benefits to offset outstanding mortgages in case they lose their jobs and are unable to service their loans.

The rules also allow borrowers to secure the requirement for initial deposits and legal fees against their pension savings.

This effectively means that anyone with retirement savings can use the money to seek financing in excess of what they would ordinarily qualify for because the financiers can take the pension savings as collateral.

It is a positive step, which should significantly lower the access barrier to the mortgages market.

By allowing use of pension savings to secure home loans, the RBA is providing mortgage lenders with two kinds of collateral, the savings and the property itself. This significantly lowers the inherent default risk, and should incentivise banks to significantly lower mortgage rates.