Why the Kenyan mortgage market is not growing
Tuesday January 17 2023
Kenyans’ dream of owning a home through home loans became a whirlwind after financial institutions began announcing new risk-based interest rate pricing formulas that make borrowing more expensive, outpacing the expected market price.
Last week, Equity Bank surprised the market by revising its interest rates for individual loans to 18 percent from 15 percent.
Rumors in bank brokers indicate that other financial institutions are drawing up new interest rates and will follow suit with announcements in the coming weeks.
The Grapevine is full of information that the new rates will be revised upwards by 3 to 5 percent on top of the current individual and corporate rates.
While it is unclear by what margins banks will decide to revise mortgage rates specifically, past trends have indicated that such revisions to the cost of credit for individual loans go hand in hand with revised lending rates across the spectrum, including mortgages. .
“Banks are aligning their interest rates to take market risks into account and following in the footsteps of the central bank’s monetary policy committee that revised base lending rates upwards,” said Arthur Ombati, an expert in real estate finance.
Read: Expensive bank charges and fees triple your home loan repayment
“Every time a financial institution raises interest rates, loan acceptance falls because credit is more expensive.”
Real estate finance experts say this development is sending the wrong signal to the market and is set to slow adoption in an already repressed home loan market as people and businesses turn away from home lending.
A source at mortgage firm Housing Finance hinted that developments around interest rates are likely to further suppress the market, a sector that has already been hit hard by Covid-19, the election and the prevailing uncertain economic environment.
“Our books are already full of housing units that have been foreclosed on but cannot be sold. Even when we advertise auctions, purchases are few. Most people don’t know this, but we are in a tight cash flow position,” said a Housing Finance official who did not want to be quoted because he is not authorized to speak on behalf of the company.
A spot check at financial institutions indicated similar cash flow concerns due to a growing inventory book of repossessed units.
But why isn’t the Kenyan mortgage market growing?
“The problem with the pricing of Kenyan home loans lies in the fact that we don’t have a full fixed rate mortgage where the interest charged at the time you take out the loan is binding until the time of closing. We don’t have a good source of long-term capital to finance mortgages as most institutions still rely on short-term deposits that they lend as long-term home loans,” Ombati said.
“What we have are variable-rate mortgages whose interest rates go up or down with changes in prevailing interest rates as dictated by the central bank.”
The interest rate hike news comes on the heels of a recent Central Bank data disclosure indicating that mortgage interest rates had an additional 3 percent margin wedge last year compared to last year, a trend being seen by those who have taken out home loans paying up to three times the value of a home unit at closing.
The Kenyan mortgage lending market has consistently performed below average. There are only about 25,000 mortgage accounts in a country of about 50 million inhabitants.
Experts say that as a result of the new wave of interest rate hikes, those looking to become homeowners this year are likely to opt for alternatives such as fixing up tenant purchase schemes or building the units themselves little by little. little over time.
In addition, the savior of the sector, which has been specially negotiated company schemes, an agreement in which a company places a certain amount with a mortgage company in exchange for subsidized mortgage rates for its senior staff, has also been on the decline as companies are timid. far from great benefits in addition to wages during employment.
But not all is lost.
Read: Why are mortgages on the rise?
David Mathu, managing director of the National Housing Corporation, said plans are at an advanced stage to start construction on 3,500 affordable housing units at Stoni Athi in Machakos, to be sold on the market under a rent-with-option scheme. to purchase or purchase by tenant. .
“We are aware of the current market realities and that is why we are accelerating the purchase of this affordable housing project through tenant purchase schemes,” Mathu said.
“We are already engaged with the International Finance Corporation for this tenant buyout project at Stoni Athi and the financial advisory services arm is already on board. The development is being carried out under a Public-Private Partnership and as a joint venture. The project will be delivered within two years.”
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