Banks have locked out majority from the homes market

Interest rates are a key determinant of the uptake of home loans in Kenya as it is in every market.

In the financial services market, taking a mortgage is arguably one of the biggest financial commitments one could ever make. It is thus important for the borrower to know what risks are involved and to be financially prepared for them.

To achieve the dream of owning a home, most buyers flock the banks and mortgage lenders for money they need to execute their plans. Yet as things stand in Kenya, this is a dream that one can only realise at a painfully exorbitant cost.

This is because there is no uniformity in interest rates charged by banks. Only two banks charge interest rates below 14 per cent, one is at 14.9 per cent while the majority have fixed it at 18 per cent and above.

Most borrowers cannot understand why a few banks have managed to lower their rates while the majority continue to charge as high as 19 per cent and 20 per cent interest on home loans.

READ: Costly bank loans raise monthly income for mortgage to Sh58,600

Equally puzzling is the fact that it is the big banks that offer savers the lowest interest rates on deposits besides holding large current account balances in non-interest bearing savings.

Compare the gap between borrowing rates and deposit rates and you begin to understand that that spread is ridiculously high and unfair to savers. Still, banks have not showed any sign of intention to lower interest rates, but have their eyes fixed on making big profits for their shareholders.

Not even Deputy President William Ruto’s recent pleas on the matter and the Central Bank governor’s pronouncements have awakened the lenders to the pain they are causing their customers.

There is no haste to reduce interest rates because lenders do not want to let go of the operational structure that yields super profits every quarter.

This unwillingness among banks to move leaves the country with only one option — using State institutions such as Parliament and regulatory agencies like CBK to curtail high interest rates.

CBK late last year confirmed it would not be adjusting the base lending rate that the banks use to set their own interest rates, including mortgage rates.

The irony is that while the benchmark Central Bank Rate (CBR) has remained at 8.5 per cent for nearly a year, the banks have made little effort to align their lending rates to it.

The difference between bank lending rates averaging 16.9 per cent and the CBR is a spread of 8.4 per cent, an exceptionally high figure in any market.

READ: Large banks squeeze more profits out of customers than small lenders

Throughout the world, spreads remain at reasonable levels of not more than three per cent, meaning that at the current CBR banks should be lending at a maximum of 11.5 per cent.

Two banks come close at 13.5 and 13.9 per cent while the majority have chosen to hit their customers with high interest rates.

The banking sector report for the third quarter of 2013 shows that high interest rates have locked many potential home buyers out of the mortgage market, preferring instead to rent houses.

The report says many banks continue to earn a nine-point interest spread between the mortgage rates and the CBR.

Marginal deductions

The average cost of home loans remained unchanged at 16.96 per cent between July and September last year as interest rate increases by three banks offset marginal rate deductions by seven mortgage providers, keeping house financing beyond reach of the majority.

An interesting aspect of the report is that banks like NIC, Chase and Equity are using relationship pricing for mortgages based on the overall business from a customer, rather than using a fixed mortgage rate.

CBK statistics show that KCB is the market leader in the mortgage market with about 30 per cent market share followed by Housing Finance with 19 per cent.

Today the total mortgage lending stands at just over 150 billion shillings, with the potential to double if the interest rate position is reversed — almost 90 per cent of Kenyans do not earn enough to enable them to pay for mortgage at the current interest rates.

Kenya’s mortgage rates remain extremely high compared to countries such as South Africa where the average rate stands at 8.5 per cent. In the UK, one can get a home loan at the rate of 5.5 per cent while in the US the rate is 3.5 per cent.

There is need to increase affordability and accessibility of mortgages in Kenya as the high interest rates have become a hindrance to many potential buyers.

The rates mean that ongoing projects will cost more when they are finally delivered as the developer must incur higher costs of material, labour and most importantly cost of money, which are ultimately passed on to buyers.

Should the developers fail to do so, they will have to do with drastically reduced profits or suffer loses making it hard for new investors to enter the real estate market.

Over the past 10 years, the number of employed Kenyans has increased from 1.6 million to 2.2 million, while those in self-employment and SMEs rose from 800,000 to 12 million, yet the mortgage suppliers still make it difficult for the second category to access the facility.

Middle income

As things stand, we have only some 20,000 mortgages in the market, up against a population of 40 million. 

Even with the 3.9 million people who are deemed to be in the middle income bracket, this represents just 10 per cent of the market potential.  

In Kenya, the middle class is made up of those earning between Sh25,000 and Sh120,000 a month. This effectively means only 11 per cent of Kenyans earn enough to support a mortgage, even for an entry-level house.

With an interest rate of 18 per cent, one has to part with monthly payment of between Sh13,260 and Sh15,130 for a Sh1 million house.

To qualify for that mortgage, one has to earn between Sh39,780 and Sh45,400 per month, an earnings bracket that is home to only a few Kenyans.