A State-backed mortgage refinancing company has doubled the size of subsidised home loans to Sh8 million due to the rising cost of buying houses.
The Kenya Mortgage Refinancing Company (KMRC) also raised the allocation to 105 percent of the value of the purchased home from 90 percent, reducing the need for upfront payment.
While home prices fell marginally in the quarter to December, the cost of properties in Nairobi, for example, has risen by double digits since 2020 on the back of renewed demand from buyers who had slowed down acquisitions at the peak of Covid-19 economic hardships.
This forced KMRC to double the size of its mortgages that are lent at an average of 9.5 percent—which is lower than the market rate of between 11.5 percent and 18.18 percent.
At Sh8 million, the KMRC-backed mortgage is still lower than the average home loan size in 2021 that stood at Sh9.2 million.
Participating banks and saccos are now required to lend prospective homebuyers up to Sh8 million in Nairobi metropolitan area — which extends to neighbouring Kiambu, Machakos and Kajiado counties — from Sh4 million previously.
The funding for the purchase of homes in the rest of the country has also been raised to Sh6 million from Sh3 million.
“Inflation already increased the cost of inputs and that means you have to also increase available financing for units,” KMRC chief executive Johnson Oltetia said.
“We will continue to adjust things as the environment continues to evolve.”
Inflation, a gauge for the average increase in prices of goods and services over 12 months, last year averaged 7.6 percent compared with 6.1 percent the year before.
Key construction materials such as steel, paint and cement were hardest hit by elevated price growth, which was partly spurred by persistent disruptions in global supply chains on the back of the Russia-Ukraine war.
Russia and Ukraine account for nearly a fifth of the global export of steel. Besides raising the maximum mortgages per housing unit, the KMRC has also raised the loan-to-value ratio to 105 percent from 90 percent previously.
This eliminates the need for prospective homebuyers to pay a deposit of at least 10 percent of the value of the house before tapping the mortgage.
This means a buyer looking for funding for a house valued at Sh3 million, for example, can now access a loan of up to Sh3.15 million from participating banks and saccos from Sh2.7 million previously.
“Some people will want to own a home, but they cannot raise that deposit that is required for the purpose of buying that home. So we have removed that rigidity and actually increased LTV [loan-to-value] to 105 percent which means five percent above the value [of the house] will be used for those incidental costs that come in,” Mr Oltetia said.
“So the bank will give you money for buying the house and also give you money to finance the incidental costs like legal fees and valuation so that there’s no barrier for you to own a house.”
The mortgage refinance firm, which got permission to formally start operations in September 2020, offers funds to banks and saccos for onward lending to homeowners at an annual interest of five percent.
The recipient lenders are, in turn, expected to lend out the cash at a single-digit interest rate. Mortgage firms have shied away from writing housing loans, mainly due to a lack of long-term deposits in the industry to match them.
KMRC will now feed the banks with long-term funding, reducing their reliance on short-term loans.
High-interest rates have also been blamed for keeping mortgages out of the reach of many people.
Banks accessing KMRC loans are KCB, Housing Finance, Co-op, Absa, Stanbic and Credit Bank, while saccos are Stima, Tower, Unaitas and Ukulima.
Commercial banks in Kenya had only 26,723 mortgage accounts in their books worth Sh245 billion as at the end of 2021, according to the Central Bank of Kenya (CBK) data.
The cost of construction has been a major impediment to building affordable housing units, hurting the State’s plan to erect 500,000 units in five years through 2022 under the previous administration of former President Uhuru Kenyatta.
His predecessor, William Ruto, who served as Deputy President between 2013 and 2022, has set an ambitious target of 250,000 units every year.
The average cost of building a house was estimated at Sh34,650- Sh77,500 per square metre early last year from Sh33,450- Sh72,400 per square metre in late 2020, according to research by Nairobi-based Integrum Construction Project Managers.
“Considerations into the reduction of construction costs and employment of global best practices are foremost in achieving sustainable progress in affordable housing,” Charles Hinga, the Principal Secretary for Housing and Urban Development, wrote in a newspaper article late December.
“Key steps have been taken to reduce construction costs, including exemption of value added tax (VAT) on importation and local purchase of goods for the construction of houses under the affordable housing scheme. Developers will also pay a lower corporate tax of 15 percent for construction of above 100 units.”