Kenyan banks have averagely cut mortgage terms by more than a year to 10.9 years, but increased interest rates in the last year, handing consumers a double blow in their dream to own homes.
A Business Daily analysis of data from the Banking Supervision report from the Central Bank of Kenya (CBK) revealed that banks increased interest rates on home loans from 11.3 percent in 2021 to 12.3 percent last year but cut the loan maturity from 12 years to 10.9 years.
“The average interest rate charged on mortgages in 2022 was 12.3 percent and it ranged from 8.2 percent to 17 percent compared to an average of 11.3 percent with a range of 7.1 percent to 15 percent in 2021,” said the CBK.
Banks increased interest rates on home loans in line with a decision by the apex bank to raise basis points, piling pressure on potential homeowners.
“The average loan maturity was 10.9 years with a minimum of 5 years and a maximum of 18 years in 2022, as compared to an average loan maturity of 12 years with a minimum of 5 years and a maximum of 20 years in 2021.”
The double blow for consumers coincided with a spike in the number of non-performing mortgages in the banking sector, rising by the sharpest margin in five years to Sh37.8 billion, translating to a 33.6 percent jump compared to the Sh28.3 billion in the previous year.
This points to the deep struggles of Kenyans in a deteriorating economic environment.
Data from the CBK showed KCB, the largest mortgage lender by market share, reported the sharpest increase in bad home loans, hitting Sh14.6 billion in 2022.
This accounted for 50.6 percent of the total Non-Perfoming Loans (NPLs) in tier-one banks from Sh8.9 billion in 2021.
Bad loans from nine large banks, including KCB, Absa and other listed lenders, accounted for 76.3 percent of the total NPLs in 2022 from 65.8 percent in 2021.
Churchill Ogutu, an economist at IC Group, said lenders are potentially modifying the mortgage lending terms to the pre-pandemic levels after issuing a raft of reprieve measures to customers.
“Banks are more or less returning their mortgage books to pre-Covid levels, because during the pandemic there were measures to shield Kenyans from high mortgage rates,” said Mr Ogutu.
“Over the course of last year there were over 175 basis points increase from the CBK and whatever the interest rate a bank charges on its customers is benchmarked against the CBK rate, so with the increase in September and November, that fed into the upward revision to mirror the apex bank.”
Mr Ogutu says that Kenyans should expect and gear up for higher rates on the backdrop of higher rate increases this year.
“Considering we have had a series of other rate hikes this far in the year, we should also expect average interest rates also going higher in 2023.”
Michael Odundo, a Standard Investment Bank research analyst, concurs with Mr Ogutu that the rate hikes were as a result of the CBK’s rate.
“The rising rates are due to the hikes in the market from CBK who have been raising the benchmark hence the pricing is on the higher end of the spectrum,” said Mr Odundo.
He adds that manufacturing, real estate and trade are the sectors contributing to the high NPLs because they are credit-intensive.
On March 18, 2020, the CBK announced emergency measures to cushion borrowers from the adverse economic effects of the pandemic.
According to the CBK, banks were to provide relief to borrowers on their loans based on their circumstances arising from the pandemic, extend their loans for a period of up to one year and meet all the costs related to the extension and restructuring of facilities.
The Kenyan mortgage market was dealt a blow after financial institutions began announcing new risk-based interest rate pricing formulas, making the loans more expensive and outpricing the intended market.
Kenyans surveyed by the apex bank said the barriers to buying a mortgage were low levels of income (31 percent) and high cost of the property (23 percent).
Others cited limited access to affordable long-term finance (18 percent) and titling difficulties at 16 percent.