For long, households earning less than $1,500 (Sh150,000) per month in Kenya have been locked out of the mortgage market due to high housing prices on offer and short repayment period for loans.
Much as families in this mass market segment, currently in rental accommodation, desire to own homes in urban centres, their low incomes have put them in a mortgage gap.
All that is set to change with the ongoing efforts to remove access barriers and make mass housing affordable and available.
Through the newly formed Kenya Mortgage Refinance Company (KMRC), and with World Bank Group support, housing finance will now be pushed down to the neglected lower end of the market. With that, more households are set to become eligible for home loans, based on their incomes.
The KMRC will provide local lenders with wholesale long-term finance for onward lending of home loans to urban families under long repayment terms thereby addressing the issue of affordability.
For saccos and microfinance banks which are big providers of housing finance to the lower-end of the market, the available mortgage loans have short repayment periods up to 5 years, because they lack long-term funds. They rely on short-term customer deposits as their main funding source, restricting their loan book size and capacity to lend long-term.
This has essentially had the effect of raising the income eligibility threshold for the home financing facility way above the reach of millions of workers, even with interest rate caps in place.
The length of financing is a factor that is often overlooked but can make a significant difference in affordability, much more than cutting interest rates.
For instance, taking a $20,000 (Sh2 million) loan at the current maximum allowable interest of 13percent over a repayment period of three years would require a borrower to have a monthly income of $2,020 (Sh202,000) for a financial institution to underwrite the loan. This is a tall order for millions of households in a country where only three per cent of salaried workers earn more than $1,000 (Sh100,000) per month.
However, if the repayment period for the $20,000 mortgage loan is extended to 15 years, for instance, the income eligibility threshold drops steeply to $760 (Sh76,000), bringing more workers into the brackets of those who qualify for home loans.
Besides enabling more households to qualify for mortgages, longer maturities offer borrowers more breathing space for loan servicing, freeing up cash for other uses and allowing them to better manage their monthly budgets.
By contrast, lowering the interest rate to 8 per cent from 13percent with the same three-year repayment period hardly increases affordability (monthly income required is ($1,880) Sh188,000).
With a $240 million (Sh24 billion) long-term funding from the World Bank and a further $100 million (Sh 10 billion) from the African Development Bank, the mortgage facility will help address existing liquidity mismatch between short-term customer deposits held by banks and saccos, and long-term loans.
KMRC will only lend to primary mortgage lenders, allowing them to increase the repayment duration of their loans.
These lenders will keep doing what they do today, assessing customers’ credit risk and making decisions on whether to lend, but they will have many more customers eligible for a long-term mortgage loan.
Loan maturities will be progressively extended over time, bringing on board even more beneficiaries in the long-run. Similarly, for borrowers who benefit from long-term maturities, it is important to plan their expenses so that they repay their loan regularly, much like they do while renting.
Much as lower interest rates are preferred, they are often driven by the government’s cost of borrowing, so any rate below such cost is not sustainable over the long-term.
By contrast, injecting long-term funds into the financial system is a sustainable way to make housing finance more affordable.
Felipe Jaramillo is World Bank Country Director for Eritrea, Kenya, Rwanda & Uganda and Jumoke Jagun-Dokunmu is IFC’s Regional Director for Eastern Africa.