The cost of mortgages has risen as banks push more borrowers to sign contracts that allow for variable interest charges at a time rates are increasing.
Mortgages with variable interest rates expose borrowers to a higher cost of servicing the debt. They could also lower their interest expenses when rates fall.
A new report by the Kenya Mortgage Refinance Company (KMRC) found that banks last year stepped up the issuance of mortgages on variable rates, with more borrowers now exposed to higher debt service costs.
“About 88 percent of mortgage loans were on variable interest rates in 2021, as compared to 80.2 percent in 2020. The increase in variable interest rates was consistent with the increase in the value of outstanding mortgage facilities in the year,” said KMRC in the report dated June 2022.
The initial interest rate on such facilities may be favourable at the beginning but it can increase significantly later on due to macro-economic factors that end up raising relevant factors like inflation and returns on risk-free assets including T-bills.
According to the Central Bank of Kenya (CBK), the average mortgage lending rate rose to 11.3 percent in 2021 as compared to 10.9 percent the year before.
The interest on the facilities ranged from 7.1 percent to 15 percent last year compared to between seven percent and 15 percent in 2020.
The mortgages on single-digit rates represent those backed by KMRC which provides funds to the primary lenders at five percent.
Banks are less keen to expand the pool of fixed-rate mortgages, a signal that they expect the cost of funds to rise in the long term.
Mortgages in Kenya are currently repaid over five to 25 years after banks extended the tenor of the facilities.
“The average loan maturity was 12 years with a minimum of five years and a maximum of 25 years in 2021 … This is an indication that banks increased the period of mortgage facilities in 2021,” the KMRC report read in part.
Interest rates have a significant impact on the overall long-term cost of purchasing a home through financing.
The rising inflation and the Central Bank of Kenya’s monetary policy are all pilling upward pressure on mortgages.
The government’s fiscal agent raised its benchmark interest rate to 7.5 percent at its May 2022 MPC meeting which marked the first rate hike since July of 2015, seeking to rein in inflation.
The expansion of KMRC’s role in the mortgage sector is expected to lower the cost of purchasing homes.
The institution, owned by the government, banks, and other agencies including Shelter Afrique, seeks to expand mortgage access to those earning less than Sh150,000 per month.
The report identified a number of impediments to mortgage market uptake and development, including the impact of the Covid-19 pandemic, low level of income, lack of understanding of mortgage products by consumers, and high cost of property purchase.
The mortgage refinancer had by the end of last year accessed Sh6.5 billion in capital for onward lending.
It has lent to Housing Finance group and Co-op bank among other institutions.