Markets & Finance

Mortgage borrowers opt for fixed interest rates in harsh economic times


A section of Hidden Creek Estate in Kiambu County. CBK data shows that only 2,445 new mortgages were issued by 34 banks in 2015. PHOTO | SALATON NJAU

Last year was hostile for home buyers in Kenya. Many were forced to adjust terms of paying for their dream homes as interest rates rose sharply, ballooning their mortgage payments.

Recent data from the Central Bank of Kenya (CBK) suggests that home buyers had to renegotiate terms, including extending maturity periods and opting for fixed rates as the high rates pushed outstanding mortgages in the country up by Sh39.3 billion.

CBK data shows that while only 2,445 new mortgages were issued by 34 banks in 2015, outstanding mortgage went up from Sh164 billion to Sh203.3 billion which means the balance after a whole year of servicing went up instead of down, pointing towards renegotiation.

This partly explains why in the difficult period, where average mortgage rates rose from 15.8 per cent in 2014 to 17.1 per cent in 2015, only one extra loan account defaulted.

Non-performing loans (NPLs) went from 1,474 to 1,475.

CBK noted that home owners had adapted and were moving to hedge their bets on a fixed rate rather than get exposed to interest rate fluctuations.

“About 89.3 per cent of mortgage loans were on variable interest rate basis in 2015 compared to 92.5 per cent in 2014.

‘‘There seems to have been more uptake of fixed rate mortgages by home owners to protect themselves from interest rate fluctuations,” CBK says in the 2015 Banking Supervision report.

The banking regulator also noted that the average loan maturity was 9.6 years with a minimum of five years and a maximum of 20 in 2015 compared to an average loan maturity of 10.6 years with a minimum of three years and a maximum of 20 years in 2014.

There has been a growing fear that high interest rates, poor performance of the economy and job freezes and layoffs in 2015 set stage the for a wave of mortgage and loan defaults that may put middle home owners at the risk of losing their dream houses.

READ: Mortgages still out of reach for over 90pc of Kenyans

Although 2016 data is yet to be released, the sector seems to expect a spill over effect which could shake the mortgage market hard this year.

“Yes, there are a few cases that have experienced defaults on account of the persisting difficult macro environment but we continuously engage our customers for remedial action,” Mr Sam Waweru, the Housing Finance Corporation MD said.

Mr Waweru admitted that while most of the customers affected had been cooperative and agreed to rehabilitation packages discussed and in some instances HFC had rescheduled the facilities in terms of the duration of payment, others were non-cooperative.

“For the non-cooperative ones we follow the recovery process as stipulated by the law of the land if we have to foreclose although this is a last resort measure for us,” Mr Waweru wrote to the Business Daily.

Defaulting on a mortgage in Kenya is difficult to deal with since most of the property cannot be sold at a profit because the loan amount is often at or near the appraised value, up to 90 per cent.

“It is worth noting that banks mostly finance mortgage loans with loan to value (LTV) of below 90 per cent,” the CBK said.

Should there be foreclosure, the lender may find it difficult to sell the home for enough money to cover the outstanding mortgage balance and make a profit, which means the borrower may still pay more even after losing the home.

There has been an increasing number of litigations as banks and mortgage finance companies rush to recover non-performing loans while their clients try to stop them.

According to 40 credit officers polled by the CBK last year, there has been a rising risk of mortgage and personal defaults due to the rise in lending rates and the government’s delayed payments to contractors.

The October 2015 survey indicated that defaults were set to rise on loans issued to individuals and real estate investors.

“Banks foresee increasing NPLs in the personal/household, building and construction, manufacturing, real estate, agriculture and trade sectors,” the CBK said. Housing Finance alone saw its non-performing loans rise from Sh4.1 billion in December 2015 to Sh4.5 billion as at March 31 this year.

According to the 2015 Economic Survey, loans advanced to the construction sector by commercial banks grew almost threefold in the last five years.

Back in 2010 the sector borrowed about Sh32 billion from banks which had jumped to Sh69 billion by 2012 before rising to Sh80 billion in 2014.

Bankers said they may intensify recovery efforts from high risk segments to ease the impact of the defaults on the lenders’ profitability.

Customers have on their part rushed to file for temporary orders to delay or even change the terms of agreements within which to restructure their loans.

While some have succeeded others have failed based on individual merits of their cases. According to suits reviewed by the Business Daily, most clients have resorted to obtaining stay orders after banks charged their assets to recovery loans.

Mr Gerishon Mbugua Kang’ethe got a lifeline last month when the High Court gave him temporary relief from HFC which was seeking to attach his parcel of land in Muguga, Kiambu.

Fallen on hard times

According to court papers, Mr Kang’ethe serviced the loan for six years but had recently fallen on hard times, making it difficult to service the loan.

He therefore sought indulgence of the court for extension of the notice period to allow him to settle the entire outstanding amount due and owing to HFC.

HFC argued that it would amount to rewriting the contract but Judge Charles Kariuki stated that it would not be re-writing the agreement for the parties if the court were to intervene and extended the time limit.

Some of the clients who have got relief of stay orders subject to settling costs of auctioneers and part payment of the defaulted loan have struggled even with the relaxed arrangements.

Like in the case of Al-Jalal Enterprises Limited against Gulf African Bank, where the client got four months of reprieve even after the court ordered him to pay the bank Sh30 million by June 2014.

“This court on June 16, 2014 ordered the plaintiff to pay Sh30 million by close of business on June 17, 2014, and to pay the outstanding auctioneer fees. This was an order which provided relief to the plaintiff, and which the plaintiff ought to have complied with,” Judge Eric Ogola said. 

Al-Jalal failed to comply and instead paid only the auctioneers fees. “The plaintiff forgot that it was upon the condition of payment of the said amount that this court granted a stay of execution herein,” the judge said four months later in an October 2014 ruling but still went ahead and extended ‘‘mercy’’ to Al-Jalal Enterprises Ltd.

Major cause of defaults

Job cuts have also been a major cause of defaults, dragging former employees into court rooms after they suddenly found themselves unable to service their loans and mortgages.

As former National Bank employee, Peter Mutisya Musembi, found this out when he lost his job in 2014 after taking a discounted bank loan.

Once he was out of employment however, the loan lost its discounted rate since the preferential treatment was not extended to ex-staffers.

The bank served him a notice in March last year demanding that he services his Sh6.7 million outstanding loan or risk having his property attached as security and sold off.

In his ruling in January this year, Principal Judge Mathews Nduma Nderi turned down Mr Musembi’s prayers stating that the bank had sufficiently argued that the terms for the loan were separate from the terms of employment.

Another former employee who fell into distress after Kenya Airways suspended his salary is Mr Patrick Waweru Mwangi.

In a ruling delivered on October 3, 2013 Judge Jonathan Havelock favoured Housing Finance Corporation over the suit of an outstanding Sh23 million mortgage suit against Mr Mwangi.

Judge Havelock ruled that even though Mr Mwangi claimed that he had a case with his employers which had rendered him incapable of servicing his mortgage and that the property attached was matrimonial, he could not be in default, and yet also be in possession.

He ruled that Mr Mwangi either pays the loan or allows the bank to realise its security. 

Developers with ambitious plans to profit from the real estate boom have also been hit by rising costs which have rendered their investments untenable.

According to the 2015 Economic Survey, the overall cost of production increased by 10.4 per cent in 2014 compared to an increase of 7.2 per cent in 2013 including material input such as timber, hydrated lime, explosives, hardcore filling aggregates and structural steel.

As Mr David Ngugi Ngaari found out when he attempted to put up a four-story residential flat in Dagoretti, Nairobi, after borrowing Sh15 million from the Kenya Commercial Bank (KCB).

In April 2012 the construction company, Chikwel Limited, suddenly withdrew from the site before completion of work citing lack of funds
KCB in February 2013 issued a notice through Freeman Auctioneers seeking to sell the property.

Mr Ngaari received partial relief when Judge Francis Gikonyo gave temporary relief for a month within which the bank had to issue him with statements of how he was repaying the loan and follow guidelines of the Auctioneers Act on charging the property for sale.

While these cases may be isolated, there has been a tendency for an increase during volatile financial periods.

HFC says it always follows laid down procedures in a foreclosure and aims for out of court settlements with a win-win situation for both parties where this is tenable.

The company MD said that by continuously monitoring repayments and engaging customers the lender ensure the accounts do not fall into arrears in the first place and is able to ascertain when one is experiencing stress to engage the customer in good time for a solution.

“We have two sections which deal with this; the Early Arrears Department which monitors loan accounts experiencing early stress with minimal arrears and the Debt Management Department which deals with non-performing loans in arrears of more than 90 days,” he said.

When the CBK moved to increase the cost of credit last year to deal with the falling shilling, analysts warned that the move was likely to affect both developers and buyers of property, especially those in the low-cost housing segment.

Real Estate Agency Hass Consult cautioned that the decision to increase the Central Bank Rate (CBR) for the first time in almost four years might negatively affect prices and growth this year.

“Lending rates at the moment are restrictive to affordable mortgages and so most of the middle class are locked out of home ownership and often opt to rent,” Hass Consult Head of Research and Marketing Sakina Hassanali wrote to the Business Daily.

Will see high growth

Ms Hassanali said that a move toward single digit lending rates by the CBK and consequently commercial banks will see high growth in the mortgage market and home ownership by the middle class will no longer be a pipe dream.

Hass said that only 10 per cent of their clients take mortgages and that such arrangements were between buyers and banks, leaving developers cushioned.

“If a default happens after completion of the project and after the developer has been paid by the bank the developer is no longer a part of that equation.

‘‘The default is handled between the buyer and the bank and therefore the developer will be unlikely joined in litigation,” Ms Hassanali said.

HFC in their 2016 outlook states that high volatility of interest rates affected the uptake of loans and mortgages in the country as it discouraged borrowers and investors alike.

“The uptake of mortgages in the country is very low at the moment even when interest rates are stable. However, in a high interest rates environment most potential borrowers tend to postpone their decisions on property investments which then adversely impacts mortgage uptake,” Mr Waweru said.

Housing developments have grown over the years but whether the units will be sold under the current high interest regime and tough economy is in doubt.

Kenya remains a low mortgage market with a total of 24,458 accounts even with more people having increased disposable incomes to invest in their dream homes.