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Uptake of home loans drops after rate caps

Apartments at the Garden City Mall in Nairobi. PHOTO | SALATON NJAU | NMG
Apartments at the Garden City Mall in Nairobi. PHOTO | SALATON NJAU | NMG  

The uptake of home loans dropped for the first time in a decade as banks tightened access to mortgage financing with last September’s coming into force of a law capping interest rates.

The Central Bank of Kenya (CBK) says in a newly-released report that the number of active mortgage accounts fell by 373 or 1.5 per cent to 24,085 at the end of December – a significant reversal from where it stood in the previous period when the number of loan accounts grew at a compounded annual rate of 12.9 per cent between 2006 and 2015.

Kenya had 7,275 mortgage accounts in 2006, which steadily grew to 24,458 in 2015.

The CBK says the lenders reacted to the rate capping law by tightening the credit standards for such loans, while also shunning longer term loans, where mortgages belong, in favour of short-term credit.

Banks refused to lend to mortgage borrowers even as demand rose as more Kenyans sought to take advantage of the lower lending rates to buy homes.

“There is increased demand for mortgage loans due to perceived affordability after the introduction of interest capping law in September 2016.

There is also increased appetite for mortgages as more borrowers perceive that they can qualify for higher amounts,” said CBK in its 2016 banking supervision annual report.

“But commercial banks have on the other hand introduced tighter credit standards so the actual mortgage disbursements have been lower than the increased demand,” the CBK says.  

The trend makes for gloomy outlook for the mortgage sector, which has over the years been seen as underperforming due to the relatively low number of accounts for a country of 45 million.

Previously, high cost of credit was cited as a major impediment to the growth of the mortgage market, alongside high cost of property and incidental costs that include stamp duty, legal and valuation fees.

Last year, however, the signing of the rate cap law resulted in the average interest rate charged on mortgages falling to 13.46 per cent, from 18.7 per cent in 2015.

Borrowers were also keen on a fixed rate mortgage following the rate law as they looked to lock in the benefit it offers, should there be a revision down the road.

“About 62.1 per cent of mortgage loans were on variable interest rates basis compared to 89.3 per cent in 2015. There seems to have been more uptake of fixed rate mortgages by home owners after the introduction of interest capping law,” said CBK.

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