Policymakers and financial institutions should urgently work on a model that will allow borrowers to take home loans at fixed interest rates and for reasonably longer periods.
The current system where banks provide home loans at variable interest rates and for an average period of 10.9 years — far shorter than the duration in developed markets— will continue to record limited success.
As structured currently, the formal mortgage market is suited for high-income earners who are able to fork out the six-figure monthly sums required to pay the loans within a decade while also absorbing the occasional jump in interest rates.
Last year was particularly bad for home loan takers as they were hit by higher debt service costs and reduced repayment period. Banks, for instance, increased interest rates to an average of 12.3 percent from 11.3 percent in 2021.
The loan maturity was, meanwhile, reduced to an average of 10.9 years from 12 years, according to the latest Bank Supervision Report published by the Central Bank of Kenya.
Predictably, defaults on home loans increased as some borrowers could not cope with the actions taken by the lenders.
There is an opportunity to design long-term mortgages –lasting 15 years or more— issued at fixed interest rates, which enable home buyers to better forecast their monthly outflows.
This will also allow more people to buy homes since the amounts payable per month can fall significantly if the repayment period is longer.
In the developed markets, mortgages have a term of up to 30 years and borrowers have the option to take such facilities at fixed interest rates.
This will expand options and has the potential to significantly grow mortgage accounts beyond the 27,786 recorded as of December 2022.
Borrowers can refinance to switch from one mortgage product to another to take advantage of changes in interest rates.
The expansion of mortgage products should be one of the key aims of the State-backed Kenya Mortgage Refinance Company (KMRC).