Markets & Finance

High mortgage rates erode income on rental houses


The Mortgage Company managing director Caroline Kariuki at the launch of the TMC report on Wednesday. Photo/Salaton Njau

High mortgage costs have raised re-payment rates on house loans to double the rental earnings on property, a survey by real estate firm The Mortgage Company (TMC), has showed.

Developers of mortgage financed houses who rent out complete units are therefore incurring losses when they factor in mortgage repayments, the TMC report released Wednesday concluded.

“Rents and mortgage payments on identical properties revealed that payments are now running at typically twice prevailing rents, deterring landlords from buying mortgage-financed properties and leaving developers with unsold units,” said Carol Kariuki of The Mortgage Company during release of the report.

The TMC survey said the breakeven rate at which house loan repayments are at par with rental income is about 4.7 per cent, which is far lower than the current average mortgage cost of 18 per cent.

Ms Kariuki noted that only one lender, the Co-operative Bank, had cut its rates in the first three months of the year despite the fall in key indicators such as inflation and the Central Bank Rate. The bank reduced its mortgage rate to 15.75 per cent, making it second to Barclays Bank’s 15.5 per cent.

Commercial banks have been slow to lower their lending rates arguing that they were still paying high interest rates to fixed account deposit holders who provide the bulk of their funds.

(Read: Cost of loans to remain high, say banks)

TMC said rental yields had remained flat at 6.22 per cent, making mortgage financed properties record a sixth consecutive quarter as a loss making asset.

“Those who buy to let are losing money. Those who buy to live in are losing money. And while all these owners will eventually make gains, as exacerbated shortages push house prices up further, the entry point will continue to move further out of reach for the vast majority of Kenyan families and wage earners,” said Ms Kariuki.

Real estate firm, Hass Consult, indicated in its first quarter property index that rents surged in the first three months but were slowing by March. The surge is attributable to the higher mortgage repayments and enforcement of rental income tax.

“The push is coming as expensive mortgages tie potential buyers into renting, amid some tightening of rental supplies, and with landlords seeking better returns after almost two years of relative losses,” said Sakina Hassanali, head of research and marketing at Hass Consult.

The Hass Index showed house prices were static in the first quarter due to election fears. Following peaceful elections the property company expects increase in demand but a slow rise in prices.

“Initially prices were not moving as there was stock but in time will get pressure as 2011-2012 high interest rates stalled projects,” said Ms Hassanali.

Building materials and land are the main components of the high costs. Hass Consult proposed a review of the Building Act to allow use of cost effective modern technologies, and setting up a securitisation programme where financiers can obtain funding from the capital markets.

“The cost of infrastructure adds 20 to 30 per cent to the cost of homes. If this could be addressed through infrastructure bonds serviced through utility payments we could achieve a significant reduction to the cost of homes in the country,” said Ms Kariuki.

Currently some of the cheap properties in Nairobi are available in Komarock where they cost Sh4.1 million and Tena at Sh4.9 million. At the cheapest available rate of 15.5 per cent over a period of 15 years a mortgage buyer will be required to pay Sh55,500 monthly instalments.

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