A mortgage can cut a 25-year journey to owning a home to just a day’s chat with your banker. But it can also reduce your 25 years of happiness to just that one day’s chat. And you can easily sign for either choice.
Francis Joseph Kamau Ichatha applied for a mortgage of Sh1.3 million in 1991 and a further Sh300,000 in 1992 from Housing Finance. He was to pay a monthly instalment of Sh 26,273 at the rate of 18 per cent a year for a period of 15 years.
Both parties agreed that the interest rate would only be varied with the concurrence and prior written approval at least with a four-month notice. However, HF was accused of varying this to 26 per cent and selling Mr Kamau’s property in 2005.
Mr Kamau then sued HF. He accused HF of negligently and fraudulently debiting his account with “illegal, non- contractual and unconscionable charges.”
In court, it was ruled in August 2014 that HF was not entitled to penalty interest, interest on arrears or default charges, bringing to an end 23 years of tussle.
“Can it therefore be said that a practice in which the banks unilaterally decide to load the customer’s account with penalties at their own discretion whose rates are only known to the bank is such a certain practice that it can be said to amount to trade usage?” posed the court.
And it is with such cases in mind that in 2001, a financial consultancy firm, Interest Rates Advisory Centre Limited (IRAC) was set up and is run by bankers, advocates of the High Court of Kenya, IT consultants and other professionals.
Overcharge a customer
It audits banking facility contracts like loans, overdrafts, mortgages and hire-purchase agreements and reconciles them with customers’ bank accounts. IRAC then produces a report that shows whether a lender has overcharged or undercharged a customer.
On its website, it has a digest of cases disgruntled customers in legal fights with banks such as Housing Finance and KCB.
According to Kenya Bankers Association CEO Habil Olaka, customers are sometimes to blame for prioritising getting the mortgage rather than understanding the terms first. He advises customers to ensure there is a common understanding of the interpretation of all clauses in a mortgage contract before appending their signatures.
“The critical thing is that before getting into a relationship, you have to understand what the terms for the product are,” says Mr Olaka.
“Sometimes customers are in hurry to sign but not bother with terms and conditions. Later on, when this is brought to their attention, they deny ever seeing it.”
According to Wilfred Onono, the managing consultant at IRAC, customers should make sure that such long term contracts are backed up with a solid source of revenue that will ensure payments are honoured on time.
“If you don’t make your payments on time, you are in the situation of compounding interest. The interest is debited in your account every month, increasing your indebtedness and eventually leading to higher payments,” says Mr Onono.
Mr Olaka says customers who run into hard times should be brave enough to approach their banks early enough for an honest conversation.
“Banks will be willing to work with a customer for a way out on payment schedules. It all depends on negotiation as opposed to being quiet and hoping that by some magic, the bank will not come for them.”
He cautions that defaulting without explanation invites banks to immediately fall back on the collateral, mostly leading to loss of the property.
The average size of a home loan advanced by Kenyan banks has risen by nearly Sh2 million in one year to hit Sh10.9 million by end of 2017, according to Central Bank of Kenya data.
Mr Olaka advises that since mortgages come with significant amount of money tying the bank and customer together for a long period, there is need for this relationship to start off on common ground through lawyers.
The bigger the amount, the more each party needs to safeguard itself using a lawyer, according to Mr Olaka.
“Customers need somebody on their end to ensure that their interests are also safeguarded. Banks will always put in terms to ensure that in the event of default, they fall back on collateral. They will also ensure you pay them ahead of meeting other monthly costs,” he explains.
Having a lawyer, he says, is the only way to ensure no unusual terms get into the contract. And issues of interpretation of clauses always crop up.
Even with the onset of the era of capped interest rate, Mr Onono says some banks say that this does not cover interest on defaulted mortgages.
This has resulted in different interpretation, with some banks charging interests above the maximum rate for loans in default, a case IRAC considers an illegality.
“There are a few banks that when we check their interest, we discover they have actually charged more. When we ask, they say amounts in arrears are not covered in rate caps laws. That’s subject to interpretation,” he says.