The Kenyan dream of home ownership through mortgage loans has been thrown into a whirlwind after financial institutions began announcing new risk-based interest rates pricing formulas making the loans more expensive, outpricing the intended market.
Last week Equity Bank surprised the market by revising their interest rates for individual loans to 18 percent from 15 percent.
Word on the banking corridors indicates that other financial institutions are working out new interest rates and will follow suit with announcements in the coming weeks.
Grapevine is ripe with information that the new rates will be revised upwards between 3 percent and 5 percent on top of the current individual and corporate rates.
While it is not clear by what margins banks will decide to review mortgage rates specifically, past trends have indicated that such revisions of the cost of credit to individual loans go hand in hand with revised loan rates across the spectrum including mortgage loans.
“Banks are aligning their interest rates to take into account risks in the market and following in the footsteps of the Central Bank’s monetary policy committee which revised upwards base lending rates,” said Arthur Ombati, a property finance expert.
“Any time a financial institution increases interest rates, uptake of loans drop because credit is more expensive.”
Property finance experts say that this development is sending the wrong signal to the market and is bound to slow down the uptake of an already suppressed mortgage loans market as individuals and corporates shy away from mortgage loans.
A source at mortgage firm Housing Finance hinted that the developments around interest rates are bound to suppress the market further, a sector that has already been battered by Covid-19, elections and the prevailing uncertain economic environment.
“Already, our books are full of housing units that have been repossessed but can’t be sold. Even when we advertise for auctions, purchases are few. Most people don’t know but we are in a tight cash flow position,” said an official at Housing Finance who did not wish to be quoted as they are not authorised to speak on behalf of the firm.
A spot check across financial institutions indicated similar cash flow concerns due to a growing book of inventory of repossessed units.
But why is the Kenyan mortgage market not growing?
“The issue with the pricing of the Kenyan mortgage loans lies in the fact that we do not have a full fixed rate mortgage where the interest charged at the time of taking the loan is binding until the time of closure. We don’t have a good source of long-term capital to fund mortgages as most institutions still rely on short-term deposits which they lend as long-term mortgage loans,” said Ombati.
“What we have are variable rate mortgages whose interest rises or drops with the changes in prevailing interest rates as signalled by the central bank.”
The news of rising interest rates comes in the wake of a recent Central Bank data revelations which indicated that interest rates charged on mortgages had an extra 3 percent interest spread wedge last year compared to the previous year, a trend that is seeing those who have taken mortgage loans paying up to three times the value of a housing unit by the time of closure.
Kenya’s mortgage loans market has consistently performed below par. There are only about 25,000 mortgage accounts in a country of close to 50 million people.
Experts say that as a result of the new wave of rising interest rates, those looking at owning homes this year will most probably opt for alternatives such as tenants' purchase scheme arrangements or build the units themselves piecemeal over time.
In addition, the saviour of the sector, which has been specially negotiated company schemes—an arrangement where a firm places a certain amount with a mortgage company in return for subsidised mortgage rates for their senior staff—has also been on the decline as firms shy away from heavy perks on top of salaries during employment.
But all is not lost.
David Mathu, the managing director of National Housing Corporation said that plans are at an advanced stage to begin construction of 3,500 affordable housing units at Stoni Athi in Machakos which will be offloaded into the market under a rent-to-own or tenant-purchase programme.
“We are cognizant of the current market realities and that is why we are fast-tracking this affordable housing project to be bought through tenant purchase schemes,” said Mathu.
“We are already in engagement with International Finance Corporation for this tenant purchase project in Stoni Athi and the financial advisory services arm is already on board. The development is being done under a Public-Private Partnership and as a joint venture. The project is to be delivered within two years.”